By Roger Golesworthy, Trading Director, Infront.
For firms all over the UK in the trading business, speed and efficiency are essential. These set the base for providing clients with better returns.
Behind the curtain, though, firms have a patchwork of systems and software that sit in-between humans and financial instruments. Systems which must meet a range of demands, such as those from regulators, clients, and internally, as IT budgets must be met.
With the principal concern balancing these demands with the need for speed and efficiency, firms scramble for technological solutions. But for everyone trading client business, the cure lies more in a process rather than new technology adoption. That process is automation.
The Systems Jungle
The trading business, like many others, has seen a gradual addition of technology and systems, technology forming the pipes of trading, connecting front and back-ends. Here, order flows are often complex, coming into one system, vanishing in between, and emerging in a new system. Employees at trading firms may receive an order on one of their screens, and then enter it in another.
With this type of multiple keying being the norm, the human errors that come with it are also common, notwithstanding latency problems. Collectively, these issues result in slow, inefficient workflows where firms can easily miss time-to-market.
And in this systems jungle, it is also nearly impossible to establish any type of serviceable provenance.
What unites front and back-end systems is automation. Yet, it’s more than just a connector: it codifies the order of processes. A clarity of chain of custody necessitated by regulation.
Regulation and the audit trail
The growing regulations in the financial industry are a direct response to the possibilities afforded by technology, particularly in terms of speed and data availability towards transparency.
Regarding financial regulation, there are none that have more impact on client trading businesses than MiFID II. This directive, as well as regulations in general, requires a complete audit trail, from the client order coming in through to order completion.
Yet if an order is received on one screen and entered on another, audit trails are interrupted. There is no single point of audit. At the heart of establishing audit trails is clarity and something key to every firm’s business: trustworthiness. Firms also need to be able to prove to clients that they’re executing to the best of their ability.
This makes the case for automation, as it establishes straight through processing.
Building better relationships with clients by embedding thinking
Currently, many firms struggle to prove to clients why their way of trading is better than the next firm’s. What will help them unlock value for both themselves and their clients is having reproducible outcomes.
The first step in creating reproducible outcomes is establishing a trading policy, outlining the details of how, and where, and under what circumstances trades are executed. After establishing this policy, firms should then encode it into automation.
Firms are obligated to publish the venues they use. The norm is that they select which dealers they do business with based on someone’s thought process or own reasoning, making it difficult to concretely state policies.
Many firms deal with this issue by indicating that their policy is to get the best price for their clients. Effectively, though, such an approach falls short because it doesn’t result in reproducible scenarios. When it comes to trading, this means embedding decisions in a machine.
The IT budget crunch
As automation can both ease the burden of regulatory compliance and provide firms with concrete evidence of their value add, the concern most have when they come into contact with these possibilities is bringing the capability on board within IT budgets.
Especially as, across the industry, many firms struggle to stay afloat as margins are squeezed.
Financial software is notoriously expensive and IT departments at firms haven’t recovered from the mass layoffs of the 2008 financial crisis. Small operations are particularly vulnerable, as many lack IT departments. In this scenario, their dealer assumes the IT role, employing familiar tools like Excel. Dealers create Excel sheets with orders and then send them along to brokers.
Inefficiencies abound as talent is thin, with compliance and security costs further aggravating the situation by placing increased demands on software. This in turn results in more expensive solutions.
Many smaller firms are currently merging with larger outfits, which can have positive outcomes for IT budgets as they create efficiencies. In acquisition, completely automating and merging order flows can result in significant savings in very little time.
However, the extreme consolidation in the UK that the industry is currently undergoing is not healthy for the overall market. A few firms with significant size and scale will eventually effectively corner the market, reducing competition.
This leaves many trading businesses, particularly smaller entities, in precarious positions.
The solution?
As stagnation is a perilous option in a sector where companies are facing significant price pressures, the one thing firms should do to increase efficiency is automation. This lays a solid foundation to begin investing in their future.
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