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Total cost of ownership in European broking

For smaller European broking firms, particularly those engaged in regional business, the implementation and management of technology and connectivity across multiple trading venues post-MiFID is proving increasingly costly and time-consuming. Adding to this pressure, client and regulatory demands to deliver best execution have to be met in a context of declining volumes and intense competition. The overall pressure on margins means that brokers have to consider carefully how to undertake any business development initiatives in the most efficient and cost-effective ways.

Meanwhile, the overall importance of technology in the delivery of brokerage services continues to grow; and as its use extends across all business processes, its cost also becomes more important. Making the right technology choices is therefore vital, and it is equally important to manage resources efficiently.

There is today an increasingly sharp realization that optimizing the management of technology can make a huge difference to its total cost of ownership (TCO).

It has become clear that regional brokerage firms cannot support the ongoing rise in technology costs that results from a business-as-usual approach, and one consequence of this is rapid growth in the use of managed or hosted services. Brokers can essentially go one or more of three ways (indeed we see increasing numbers now using all of these options):

  1. Outsource execution as a whole.
  2. Use managed, mutualized services for market data and trading.
  3. Apply the same approach for connectivity to clients.

Outsourcing of execution is widely used for global trading – in North America, Asia-Pacific and worldwide emerging markets. The European broker can offer its clients a full service for these regions, while behind the scenes the order flows are sent to local brokers via FIX links and order routing networks. Some firms have gone further and also outsourced expensive multi-venue European execution, including smart routing, but it might be argued that this is akin to “outsourcing your soul” and is a step too far for most. Fortunately, many options exist at the level of having technologies, as distinct from entire business functions, managed by service providers.

The outsourcing of market data management to vendor firms is of course long established, and trading connectivity is an obvious follow-up. In the U.S., order management and connection to markets have been handled almost exclusively via managed services, or software as a service (SaaS), for many years, and European firms are increasingly conscious that trading servers, order management systems and smart routers do not have to be run in-house.

Just as connecting to multiple exchanges is complex, so too is connecting to a large number of clients. A broker is typically required by its clients to deal with a range of connection types over many different networks, both FIX-based and proprietary. A managed services approach can render the technology transparent to both broker and clients, and also can help to deliver the flexibility and speed of response that is typically required by buy-side firms.

The decision to follow the SaaS managed services route is normally a straightforward financial one. Where a technical and operational business process is sufficiently standardized, a brokerage firm gains no competitive advantage by running that process itself. Engaging an experienced managed services provider will almost certainly result in lower TCO, and potentially in some real functional advantages, such as lower latency via co- or near-location of servers for a given trading venue.

For brokerage firms, the use of SaaS and associated simplification of business processes can enable them to achieve a significant reduction in their TCO and to place management emphasis where it should be: on looking after client relationships and growing revenues. 

 

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