Asset managers take holistic view of cost cutting
Buy-side firms are cutting costs using
increasingly smart cost analysis systems with lower trading volumes and
shrinking commissions. Chris John, CEO of Bonaire, a company providing payment
solutions for asset managers, says buy- and sell-side firms are making sweeping
changes to reduce costs across their business.
“Since 2008 there’s been a massive drive from the
buy- and sell-side for efficiency. Cost of execution is becoming a very focused
area for participants in the market today,” John says, adding that firms are
looking across their entire trading operations to save on execution.
“Firms are going for the most significant
expenses first and really trying to understand the cost structures to the
global operation rather than just by desk."
With margins contracting on commissions and
volumes, clients of providers like Bonaire are seeking tailored solutions to
reduce their execution costs.
“They’re looking much more closely at which
exchanges and products to use and which desks are most efficient and we’re
seeing a keen interest in transaction expense validation in the market,” says
The buy-side is becoming an increasingly
selective purchaser, which has forced the sell-side to deliver specific products.
“Execution is becoming more commoditised, so the
sell-side will need to become more efficient to be competitive and this is an
area the buy-side is closely monitoring through their transaction cost analysis
initiatives,” John says.
In particular, asset managers are looking at the
minute details within trading contracts to see where costs can be lowered and
efficiencies gained on a desk-by-desk basis.
“There’s pressure to get efficiencies across the
business, and trading desks may not necessarily be executing at the optimal
transaction cost simply because their contracts are written at a desk level
rather than at the global entity relationship. This is now being scrutinised to
minimise overall expense,” says John, adding that clients are under increasing
regulatory pressures and are looking for solutions to improve transparency.
"With global regulators and
legislators demanding greater transparency and reporting, financial
institutions today cannot afford to risk mis-managing their trade execution costs,"
While the data has always been available, many
buy-side firms have only recently starting going into granular detail to
isolate specific costs, evidenced by the up-take in transfer pricing.
“Execution is being scrutinised at a lower level
because the data is available.
Transfer pricing lets clients allocate costs to a
specific group or desk, instead of allocating them out over the business, to
see exactly where efficiencies can be made,” says John.
The drive to review expense data at a higher
level to add efficiencies and minimise overall expenses is at the heart of new
products sought by the buy-side.
Bonaire recently increased the functionality in their Revport fee calculation engine that allocates trade execution expenses
to specific desks, enabling firms to have a precise picture of their true costs at any given time.
The Revport engine has also proven popular
with sell-side firms including UBS Financial Services, who use it as their
automated fee-billing platform.