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Redefining the sell side
strategic customer value proposition

The technology used by sell side firms to provide e-business solutions for their institutional customers has had a spotty record over the past few years. These technologies-which form the backbone of various e-commerce strategies in the industry-are by nature complex. They've included Internet and extranet communications among firms, desktop integration, and direct connectivity to a rapidly increasing number of liquidity pools. Perhaps unsurprisingly, the success of single-dealer and multi-dealer institutional investor Web sites has been poor.

Unlike individual investors, institutional investors often deal with as many as 100 brokers, and it is logistically impossible for an investment manager to find time to visit all these single-dealer Web sites to gather information, compare data, or trade. In response, some sell side firms formed consortiums to offer multi-dealer hubs, or syndicates from which the investment manager can gather commingled information from contributing broker/dealers. Today, however, successful content syndicates are still quite rare.

Thankfully, connectivity between investment managers and broker/dealers order management systems is expanding, mostly as a result of the Financial Information Exchange (FIX) protocol. Firms are using electronic messaging for orders, executions, indications, and allocations. However, since the bulk of this traffic travels over leased lines, it is almost prohibitively expensive. (Broker/dealers have to purchase-and maintain-one dedicated line for every customer.) Thus both the message delivery and types of messages delivered should, and probably will, be improved in the future. For now, however, sell side firms continue to be under pressure from a number of unmet business needs. They must continue to find technological solutions that will improve customer intimacy, lower costs, and increase trade flow.

Today's corporate customers expect more value at a better price, especially as technological developments accelerate delivery and heighten performance expectations. Your typical institutional investor is a man under siege. As he diversifies his portfolio, seeking to manage growth and risk, he begins to trade new and various financial instruments. And in doing so, he exponentially increases the number of corporate sales people calling on him, anxious to make trade recommendations, give quotes, or offer access to the latest IPO. At the same time, institutional investors' direct electronic connectivity to an exploding number of liquidity pools has the potential to slice the broker out of the equation entirely, disintermediating him.

Given such pressures, one solution is to redefine the customer value proposition, mostly through the delivery of a particular firm's core competencies. In this way, the institution adds unique value to the services offered to customers, and maintains a competitive distinction in a crowded marketplace.

To deliver diverse portfolio management through a single point of contact requires desktop connectivity for the distribution of real-time applications, as well as the delivery of cross-asset trade functionality. This business need is forcing sell side institutions to define a new strategic customer value proposition: the Distributed Front Office.

The concept of the Distributed Front Office (DFO) is simply defined: it extends the power and functionality of the trading floor beyond the four walls of the institution. Firms leveraging this new proposition add customer value through improved customer management and process efficiencies, all while increasing trade flow.

The Power of Application Distribution
Imagine being able to take a firm's research, analysis, trade ideas, and proprietary cross asset analytics and then distribute them in real-time directly to a customer's desktop, then negotiate the trade and execute it-for the best price, of course-by selecting from a number of liquidity sources.

As an example, let's say a global investment bank wants to enable the electronic transmission of pricing a two-year vanilla swap to an institutional investor. When the sales desktop is electronically shared and market data is flowing in real time to the calculator, pricing is communicated immediately and trade decisions are made that much more quickly. By offering a variety of simple and more complex instruments, a firm's revenues can be improved by the resulting increase in average margin. Add to this the savings realised when a single account manager can pitch more products through a uniform Web and desktop presentation.

Any firm that adopts this strategy will truly have a competitive edge. It can offer multi-asset class trading functionality from a single screen, simply by allowing its various trading desks to inter-operate. Here's an example. To execute and hedge a simple vanilla swap, a number of markets need to be accessed. First, several short-term interest rate futures contracts have to be traded to hedge. Or, a bond trade is made to hedge the notional over the term of the swap. Then a repo needs to be executed to finance the bonds bought or sold.

Today, such trades are completed by a combination of old and new technologies run off disparate platforms, where trade information and pricing is shared through the simultaneous use of telephones and electronic distribution. But what if there was technology that could unify the trading of multiple instruments using a single platform and screen?

Here's one more example. Let's say a bank wished to add value for a hedge fund, corporate treasurer, or asset management customer by routing the trade to the liquidity pool with the best bid/ask price. This can only be accomplished if the bank de-fragments the increased number of liquidity sources across asset classes. Thus not only does the bank lower costs for itself and its customer, it provides an alternative to disintermediation.

All this makes a fairly compelling argument for DFO technology. However, sell side firms that want to distribute front office functionality to the buy side are faced with a number of hurdles. First, the current infrastructure organisation into asset class product silos, consisting of different non-interoperable platforms, support different trading activities. Then there is the fact that a multiplicity of information and market data sources need to be aggregated, commingled, and distributed in a meaningful way. The sheer volume of this information generally results in fatter client connections and containers, which severely affects distribution times, efficiencies, and costs. Lastly, clients typically have a confusing variety of displays to connect to, which requires extremely flexible front ends.

That's not the end of the difficulties, either. Obviously customers want to be able to have the best information and analytics to make the trading decision, and they also want to be able to immediately act on that decision. By adding order management and trade negotiation applications as a DFO offering, sell side firms can improve customer relationships. To fully complement customer offerings, sell side firms must also manage connectivity to fragmented liquidity pools, to offer customers best trade prices. Volume, efficiency, and speed are the outgrowth of leveraging the power of application distribution.

Re-engineering Sell-Side Front Offices
To extend their value propositions outside their four walls, sell-side firms are beginning to take a strategic look across the entire enterprise. Single point solutions are expanding to encompass multiple-dealer execution venues. But, to achieve the goal of an improved strategic customer value proposition often means redefining the infrastructure. Platforms able to meet these challenges will have to be content agnostic and asset class neutral. Any platform under consideration must further support real-time market data, and analytic and transactional applications distribution-and it must have flexible connectivity to various client displays and liquidity pools. It is assumed that this platform will be scalable, reliable and customisable.

A platform that is optimised for application distribution allows firms to blend rapidly customisable applications and their own business logic with rapid time-to-market strategies. Obviously, rapid application development has to be followed by rapid deployment to end-users. Newly developed applications have no return on investment while they sit waiting to be loaded onto a desktop. Also, this platform should have an open architecture for easy integration.

Now for the good news. For sell-side institutions making this leap, the benefits are enormous-and immediate. Once the sell side trading floor functionality is extended to the buy side desktop, product offerings can be expanded, distinguishing core competencies can deliver more customer value, and customers are quickly benefiting from the lower costs of electronic trading efficiencies.




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