Money managers are keen to save money on trading, but only until a trade is executed. Luckily for them, their brokers are likely to drive improvements in trade processing that will help managers trade more efficiently and with less risk.
A new report from Celent LLC, Boston, estimates that money managers will spend $1.2 billion between now and 2008 on straight-through processing. That's just 27% of the estimated $4.5 billion Celent expects the investment industry overall will spend on improving trade processing. The remaining $3.3 billion will be spent by sell-side brokerage firms.
``I would have expected there to be more buy-side (money manager) initiatives or interest in STP, but that doesn't seem to be the case,'' said David Easthope, a Celent analyst and author of the report.
Money managers are primarily focused on reducing specific costs such as commissions and are not looking too critically at the whole impact of a trade, including the time it takes to settle a trade and the risk, he said.
``These are some of the smartest people in the world, and they're so into their business - their model and picking investments - they're not operations people,'' Mr. Easthope added.
More money managers are taking control of their trading through direct market access platforms, algorithmic trading programs and other methods, leaving brokerage firms scrambling to find ways to remain relevant to money managers. Automating the trade and settlement process is one way they can do that, Mr. Easthope said.
But to date, he said he has seen little progress on the part of even big broker-dealers to take a lead in streamlining and automating the trade processing and settlement functions. Instead, they remain focused on the new market dynamics: the decreasing importance of sell-side traders and greater control of trading by money managers.
In his report, Mr. Easthope described a visit to the trading desk of a small broker-dealer where three traders handled all incoming trade orders. Orders were received by phone, e-mail, instant message and even fax. He would not identify the firm.
``Despite the presence of highly powerful communication systems and other technology platforms, the process was fraught with opportunities for error,'' he wrote.
He pointed out that since the industry ``meltdown'' in 2000, when the bear market in stocks slashed brokerage firms' profits, pretax margins at sell-side firms have climbed back above their historical 20-year industry average. But to maintain those margins, brokers need to ensure that back-office functions continue to cut operational risks and costs for their money manager clients.
``Somebody has got to take care of the buy side. That's what the sell side has to do,'' he said. ``It's do or die on the sell side. STP is really a way for sell side firms to differentiate and strip out costs and live to fight another day.''