1. T O O R E A L T O I G N O R E
The need for banks to cut trading costs is just too real to ignore. The strains of increased capital requirements, continued
regulatory pressure and innovative new entrant competition, are all conspiring to create the perfect storm that will force banks to
truly understand their cost to trade. In the front office and on a real time basis, a clear metric of the cost of trade is essential for banks
to make tough, high-level decisions. Banks need to decide which products, and even which customers are returning to the bottom
line, and which need to be removed from portfolios. Consequently, major business decisions for banks as of late are based off of
cost to trade calculations, so banks need to get it right. Presently however, stitching together the complex components needed to
construct a complete view of trade costs remains a considerable challenge for most banks.
T H E E L U S I V E E N D - T O - E N D V I E W
Why is calculating the cost to trade so elusive for banks? The first hurdle for trading entities starts with complicated capital charges
for products, based on whether they are exchange or bi-laterally traded. In addition, regulatory capital influences favor higher-rated
counterparties adding another layer of complexity to the mix, and front office implications are just the beginning. Middle and back
office costs account for most of the cost to trade, with breakouts being roughly 15% for middle, 50% back, and 35% in IT, which
can add up to over $500 million for large trading service providers. Transaction costs can range anywhere from as little as $.10 for
cash equities in the US, to up to $3,000.00 for custom derivatives. The variables for costs are vast, which makes cost capture highly
mercurial. Add on to these costs the elements of complicated brokerage, clearing and exchange (BCE) fees, (which run in the $1.5 -
$2.25 billion range for major trading firms) and we are talking about a lot of moving parts to consider.
A W I C K E D W E B
Many firms still typically rely on a patchwork of home grown and vendor applications to get reporting jobs done. With the number
of technology platforms and applications at large banks typically numbering in the hundreds or more, the intricacy of the systems
used to capture costs begins to pose real risks. Additionally, banks will be looking to pass associated trade costs back to the client
for client transactions, so providing precise trade level cost reporting will be essential. Key operational functions of trade reporting
are critical for banks, and in the past, industry players have been reluctant to consider out-sourcing. Many of these activities are
duplicative across banks, and solutions that involve shared service utilities can no longer be ignored. Reported savings of between
15 – 20% gained from out-sourcing key IT functions are making big banks sit up and take notice. To turn a profit, remain compliant,
and satisfy customer demands, banks will have to have a tight handle on complex trade costs to do business in a new world.
G A R B A G E I N …
The data enrichment component of reporting is critical for banks to assess costs, and identify cost drivers. In order for banks to have
full confidence in the data they are using, they must apply and solve a plethora of calculations using streams of trade data points,
which proves challenging on good days. You can also count on traders, senior managers, and other end users wanting the flexibility
of segregating and viewing data as a means to assess spending, and guide investment and business strategies. In addition, Informed
trade costs can arm banks with the ammunition they need to renegotiate service provider fees, which in some cases can save banks
over $100 million. Trade cost reporting can become very serious business, very quickly.
GETTING A HANDLE ON THE COST TO TRADE

2. W H AT ’ S A B A N K T O D O ?
There are numerous ways for firms to influence and reduce their costs to trade if, and when, they establish sound reporting processes.
Trading strategies to reduce capital charges will be integral, but will of course require front office, real-time trade cost calculations.
Outsourcing large scale IT programs can create substantial savings for banks, as can utilizing available and emerging financial services
utilities. The use of shared services utilities, in areas such as on-boarding, KYC and settlements, can lead to solutions that impact the
way business process services are delivered and may well change how the financial services industry manages core business functions
in the future.
F I N D I N G F U N D S T O F U E L I N N O VAT I O N
“Capco knows first-hand, from working with many major banks, that gaining control and getting educated about the cost to trade
is essential”, said Capco partner Tom Roughan, “Banks utilize that information to make strategic business decisions, and it takes
thorough, sustained focus on collecting, normalizing and analysing the data that underpins the cost components involved.” Roughan
estimatesthatCapcohasworkedwithclientstoidentifysavingsof “upto20%onanannualbasisbyworkingwiththemtocomprehend
their operational and technology costs and to assess and act decisively to improve efficiencies and realize game changing savings.”
IT budgets for banks are huge, and grew 4% this year to $188 bn, according to Celent, a financial services research firm, but issues like
regulatory change and new reporting requirements are swallowing resources. In order to compete with new technologies disrupting
the financial services industry, banks have no choice but to push for urgent reforms, unify multiple trading platforms and search
for shared service and out-sourcing opportunities that will free up funds needed to innovate. The digital challenge has officially hit
banks, and banks will need to be in top shape to stay in the fight.
F I L T E R
4. Application costs1. Internal fees
8. Membership fees
12. Region 13. Country
9. Data fees 10. Collateral
5. Exchange fees
2. Transfer pricing
Costs of a trade
6. Broker fees
3. Pre-trade data collection
7. Clearing fees
11. Broker commission
Real Time Front Office Cost of a Trade
What Products? Which Clients?
WHAT IS YOUR STRATEGY?
What Exchange? What Regions?