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European e-brokerage and STP
Few would argue that the Internet as a customer channel has changed the brokerage business for good. Customer expectations have been revolutionised. They expect to pay less for more, with lower trading commission and account charges, yet receive more research and market data.
Customers are demanding immediate and accurate information from their trading portfolios, and glitches lead to immediate calls to the call centre, a double whammy for the brokers who have to deal with the costs of the processing problem as well as calming the customer.
Brokers have responded to the pressures of increased competition and the transparency of the Internet by cutting the costs of processing, trying to increase transaction volumes per customer through special offers and new products, and by offering new value added and chargeable services.
Given the very slim margins and volatility of the markets, straight through processing (STP) is a vital concern for the e-brokers. Only through the deployment of systems with high levels of STP can e-brokers attain the operational efficiency needed to drive down transaction costs and to meet the customer demands for instantaneous service. Human involvement in processing is too expensive, slow and prone to error to be used. Human involvement is best freed up for customer service tasks.
In addition, STP will give e-brokers the scalability to deal with major fluctuations in the take-on of new accounts, in transactions and enquiries. The European brokerage boom of 2000 saw a number of brokers being advised by the regulators not to take on more accounts without improvements to their operational systems. In addition there was major staff recruitment into call centres in particular, as well as significant IT investments by many firms. Now with the sudden swing in market sentiment, the tight markets of 2001 have forced many of these brokers to reverse these initiatives as they fight to control costs.
In comparison with the more homogeneous US market, achieving true STP in a pan-European operation is a tough challenge. As already noted, brokers are seeking to expand their customer base by opening operations in new countries and by offering new products, such as options and fund supermarkets, to their existing customer base. It is a tall order to buy or build an integrated IT system to underpin these very disparate trading environments and initiatives. In practice the need for speed to market has forced brokers to seek immediate solutions, leaving them relying on a collection of systems often built to deal with a single country-specific product type, such as ISAs in the UK. Achieving consistently high rates of STP with this kind of infrastructure is clearly difficult.
The brokerage business has to rely on a complex web of other financial insitutions, execution providers, settlement providers, custodians, clearers, independent financial advisors (IFAs) to mention just a few. Adding to the complexity the e-brokers in particular have pursued many different outsourcing strategies. In extreme cases the e-brokers may have just a core of compliance and management staff with all other functions outsourced, such as web design, call centre operation, information providers, application providers and settlement staff. For STP to work it has to work across all these linkages, as STP is only as strong as the weakest link.
To achieve STP in the brokers' own systems they need systems designed to deliver it under the stress of truly high volumes of transactions and enquiries. Revamping old systems is rarely completely successful. All the industry predictions point towards a continued growth of brokerage in Europe towards US levels of participation and transactions, and much of this will come through the e-brokerage channel. Only the largest brokers in Germany today have to struggle with volumes approaching the scale of current US volumes. For others such volumes will be another new challenge, which most of the current crop of patchwork systems are not up to meeting.
Industry initiatives and the adoption of standards will improve STP across the industry, but to take advantage the brokers need systems that are robust and flexible, and which are committed to supporting the evolving standards such as FIX and XML. This is regardless of the decision whether to build, buy or outsource.
It has taken a considerable number of years for the most advanced software and application service providers (ASPs) to build systems capable of supporting global institutional trading. The international retail sector is more fragmented and the technology much newer, so most software providers and ASPs are still at an early stage in the evolution of retail systems. Due to market differences, and regulatory environments they are only able to provide market specific solutions. What the more far sighted players in this market are starting to do is to present a suite of solutions that cover the major retail markets, enabling e-brokers to pick and mix these. Provided these are built on modern open platforms, using the industry standard technologies, integration should not prove any more of a problem than is commonly found in the IT environment of institutional brokers. The main barrier may prove to be the cost of complex integration projects.
What the designers of new solutions must ensure is that the underlying architecture of their retail solutions is more volume insensitive than the previous generation of retail and institutional systems. If the predictions about the retail sector are accurate, such high volume systems will be needed to ensure that the IT infrastructure does not become a brake on business growth.
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