By Liz Collegio, Head of Product Management, Meritsoft (a Cognizant company).
Banks scrutinise every fraction of a basis point on the trading desk, yet millions can still leak away through brokerage fees.
These fees are the cost of doing business, but few have a clear view of what they should be paying across the business. That blind spot allows errors, missed discounts and incorrect fees to go undetected. At its worst, firms can end up making overpayments running into the millions.
We recently conducted a review with several banks to understand the scale of the problem. We found that firms were overpaying brokerage fees by at least 3–5%. There was no single weak link but pockets of inefficiency across the trading floor. Most overpayments arose because firms lacked timely access to the critical information needed by the right decision makers.
One bank could have saved around $200,000 annually in interest-rate derivative trading fees simply by routing trades to brokers with more favourable rates. Additionally, almost $400,000 a year was lost to leakages caused by poor data and zero automation. Over $10,000 of discounts were left on the table because a broker failed to apply them at the end of the month.
In one sample IRD portfolio, the error rate for accruals was more than 25%, leading to inaccurate cashflow and avoidable reconciliation breaks.
Taken together these costs quickly add up. A firm with annual brokerage fees around $30 million is typically overpaying between $1 million and $1.5 million.
The brokerage fee bugbear
Brokerage fees have been a perennial problem for firms because it’s often hard to quantify the losses. Before we started this study, the banks we looked at believed they had a strong handle on their brokerage expenses. As we have discovered, these errors can become pervasive, even for the firms that thought they had a solid grasp.
For many banks a large portion of overpayments stem from the complexity of trading fee schedules. They are carefully negotiated with each broker relationship, but afterwards the specific terms are not well disseminated. All too often they sit in inboxes and excel spreadsheets or with different departments that don’t handle the day-to-day trading. This causes a lack of transparency and poor oversight into spending.
The route to measurable savings
There are many areas where basic changes could produce immediate improvements in both efficiency and real substantive savings.
Brokerage rate cards are not being kept in a central, digital and readily accessible location. The fee schedules are often hidden or forgotten. Missing, aged or unsigned rate agreements exacerbate the problem. Without a validated rate card in place, a firm’s ability to dispute a broker’s charge is limited. This can grow to become a compliance and governance issue. Agreed rates should be easily accessible to everyone, especially for those on the execution desks.
Reconciliation also happens at the invoice level rather than the trade level, leading to discounts not being applied and trade mismatches being overlooked. When those leakages and discrepancies are finally discovered, it happens too late.
The solution is to move towards intraday accrual, with dashboards that give traders and management a view of brokerage spending as it happens.
Across the trading floor, in front- and middle-office functions, there is often no systematic capability to compare rates across a single asset class, region and broker legal entities. This lack of transparency needs to be addressed.
For large firms, the potential savings are counted in millions of dollars, while for smaller firms, building an efficient brokerage fee review process today ensures operations can scale as activity grows, with the added benefit of transparency baked in.
This study proves that unchecked costs can lead to sizeable overages. The bumper profits from trading have so far taken the sting out of overpaying brokerage fees. When the trading desk is doing so well, there is some leeway for inefficiency.
But trading is all about increments. Traders care about tick sizes a tenth of a basis point, one one-thousandth of a percent.
The scrutiny of brokerage fees should be no different.
Subscribe to our newsletter
