Tightening the Belt

When it comes to discussing the sell side with anyone, the most common theme that I hear again and again is one of reducing costs. Much of this is blamed squarely on regulation; for investment banks it's the Basel capital adequacy requirements, for brokers it's declining commissions and liquidity, but it all comes back to the same point at the end of the day─the margin demands shrinkage.

Some of this comes from personnel. UBS, for instance, rather publicly made a large amount of its traders essentially redundant last week by deactivating their entry passes and having HR representatives meet them in the lobby. Not the best PR, you might argue, but potentially necessary given the level of sensitive information and processes at stake. People and premises are the biggest costs to any business, but in the high-tech era of modern capital markets, technology ranks pretty highly as well.

This is true whether you're on the buy or the sell side. And I'm not just talking about execution platforms either, or high-frequency trading engines, or market data (the cost of which, we all know, is an ongoing topic of discussion among participants). Connections to exchanges, order routing, netting, all of it costs money.

When I spoke to Deutsche Bank earlier last week about their outsourcing service, this came up. Can people under the bulge bracket on the sell side be expected to be able to afford connection maintenance, system compliance with upgrades and various clearing obligations, particularly in equities and increasingly in electronically-executed derivatives? It's an awful lot of work and expense, but it's what clients expect so often it's a necessary part of the puzzle piece.

Standards help. FIX helps. But your wallet is still going to take a battering if you're aiming to be truly global in scope, and you have 70-plus venues to plug in to, not to mention central counterparties (CCPs), custodian direct connections and what have you.

Standards help. FIX helps. But the wallet is still going to take a battering if you're aiming to be truly global in scope, and you have 70-plus venues to plug in to, not to mention CCPs, custodian direct connections and what have you.

It seems likely, along with the outsourcing trend that we've all seen through the middle and back offices, that these will become services to be offered in a more embedded way than before. Deutsche's solution essentially outsources the trade lifecycle, but there comes a point where you wonder, if everything is outsourced, what does a company actually do? Is the role of a business to be an aggregator of offered services and platforms, due to acute cost pressures, or is it another evolution of the market into a new and streamlined form? Either way, it's all rather interesting.

Oh Sandy
On Monday last week, we were joking in the Waters newsroom about how Goldman Sachs would likely be spared the vicissitudes of Hurricane Sandy by virtue of the fact that it was Goldman Sachs. Just imagine, we said, the power goes out around Manhattan apart from one shining beacon of trade finance. How right we were.

On another Sandy-related note, as well, I'd like to direct your attention to my colleague Max Bowie's recent Opening Cross column, where he discusses some of the charity efforts underway in NY and NJ following the hurricane.

BST Awards
Although not strictly relevant to the Sell-Side Technology editor's letter, a quick thank you to everyone who made it to the Buy-Side Technology Awards in Westminster on Friday. The event went without a hitch, and everyone I spoke to enjoyed themselves. We look forward to seeing you again next year