The article analyses the technology initiatives of 15 firms from the global arena and understands the major areas for technology implementation, their patterns and learnings it holds for the Indian counterparts
The brokerage sector globally is seeing ever-increasing volumes with most firms offering securities across assets, markets, and investor segments. The bar on clients’ expectations is ever-rising – from analytics, to delivery and to servicing. Technology has emerged as the key link in this evolving age, helping firms move towards intelligent ideation, delivery and execution, while empowering investors from thought to trade. Brokerages globally are investing in technology – proprietary or outsourced, to develop scale and scope of their business, drive efficiencies, enhance their competitive position, while reducing opex over the long-term in this volatile industry. Brokerages are implementing tech-tools across the trade life-cycle, keeping in mind the user-market integration, convenience of delivery, security, latency, risk controls, client servicing and business continuity. Such a scenario is becoming true in India as well. This article takes a look at the recent technology initiatives of 15 firms from the U.S, U.K. and Canada (both full-service firms and discount brokers) in order to understand the major areas for technology implementation and their patterns, and what learnings they hold for the Indian players. Technology is no longer just an add-on for brokerages, but is now proving to be an indispensable business asset, hence the relevance of global benchmarking.
Technology implementations in service areas across the broking value-chain:
Research and analytics: Analytical tools for clients across portfolio planning, self-directed asset allocation and idea generation. Some of the tools include ‘what-if’ investment scenarios and quantitative equities rating models. Flexible online account opening systems are being implemented for clients having multiple relationships with a firm, including single sign-on, integrated cash account and performance reports in their integrated platforms. Online tools for advisors help develop fund portfolios, automate multi-client trade allocation, rebalance portfolios and make performance reports, as well as practice management skills for their assistance.
Trade execution platforms: Multiple delivery options across offline, online, desktop and mobile. Discount brokers have built entire USPs around their web/mobile platforms which offer direct trading access online, live news, advanced strategies and charting, customisable layouts, heat mapping and ultra-fast execution. Some also allow data streaming from third parties. Direct market access (DMA) is another area made possible with technology, by linking institutional clients with exchanges directly, through the broker. Mobile apps and websites give real-time research, analyst views, fund transfer, secure trading and monitoring. Firms are using automated phone systems that direct calls to appropriate departments, provide linkage between caller ID and client database for immediate access to client’s account. Companies are developing trading systems with order placement/execution across asset classes. Apart from trading, today’s tools are also evaluating trading strategies. With the advent of e-exchanges, brokers now offer multi-market access by integrating their software with multiple exchanges using proprietary connectivity networks etc.
Trade processing: A key achievement of technology has been lower latency, allowing faster completion of trades, lower impact cost and thus, enhancing returns. Technology has enabled newer trading strategies like algorithmic trading and high-frequency trading. These solution platforms allow even-higher trading volumes with minimal daily human intervention. With investing across multiple exchanges common trade platforms are incorporating order-routing which automatically searches for best possible prices for an order and automatically routes/re-routes the order to execute it, enabling it to retain control of the order. Market making software generate continuous bid/offer rates to exchanges. Tools provide automated links from trading systems to clearing house and settlement venues, as well as automated reconciliation of trades/positions, corporate action, securities lending, inventory management etc.
Risk management and business continuity: With trading across markets, assets and currencies now common, risk management tools are invaluable. Credit tools control portfolio concentration limits and report risk as per different categories. Tools are used to manage interest rate risk across currencies and warn clients on margin limits. Credit manager softwares test every order to ensure that the client’s account can support it and brings margin to minimum level by issuing liquidating orders in a smart sequence. Higher volumes have intensified the need for processing and storing huge amounts of data daily. They are also critical to provide redundancy in case of any eventuality. Data centers are in focus, but it needs high capital expenditure (capex). The financial sector and IT companies are exploring cloud computing as a solution for scalable computing capacity and lowering capex. Finally, business continuity plans are addressing issues like loss of data or telecom system with minimal service impact, fault tolerance and outsourcing critical business applications to vendors.
Other Areas: Business intelligence softwares enable consolidated reporting, automating collection of data, developing real-time analytical dashboards, what-if scenario analysis. It helps in the analysis of business data for insights and gain visibility into business dynamics. Web content software is being used as single base for all group websites and tested with client-user groups for its effectiveness. Web-based client servicing platforms, devising customized client services driven by the CRM inputs, integrated CRM across multiple client accounts, using CRM system for MIS data analytics and lead generation and automated accounting data feeds to make financial statements each day by mid-day next day are some of the other focus areas of technology.
Observations emerging from the usage trends of the sample companies
Client interface and trading platforms are mainly targeting the self-directed clients. Client interface platforms cover the entire spectrum – from analytics to delivery models till trade execution, so that the need for human intervention for self-directed clients is minimal. Risk management and control tools are more in focus of larger brokerage firms as they generally have higher exposure across multi-markets, especially the prime brokerage firms. Generally, small players are outsourcing while the large firms are developing proprietary systems for cost-effective scalability using their own client and operational experience. An exception is when large firms outsource to tap very high-quality vendors. Proprietary systems are mostly for analytical and planning tools, data networks and connectivity and testing models. Outsourcing needs are mainly for market research, back-office operations and maintenance of technology infrastructure. Firms operating across products are developing applications for the entire product spectrum and an integrated platform to handle all of these. However, relatively complex products still use separate platforms. Systems and platforms are being made scalable to handle incremental capacity. Continuous upgrading and also developing solutions for issues faced by the new applications are now the new normal. Favourable investor response to the better platforms shows these are not just an additional functionality, but are now becoming an integral source of generating incremental business. With clients actively partnering with firms in developing new platforms, it also shows the level of conviction clients have.
However, while the better platforms have seen good investor interest, the key question that needs to be addressed is whether companies achieved in capturing the value from these tools in its profitability, or did the client only get the value?
In conclusion, technology gives the opportunity to develop the scale and scope of the firm’s business and gain a competitive edge. It gives an opportunity to scale up at a comparatively lower incremental cost. Clients get the convenience to trade as they wish. Analytics tools create engaging client experience and enable quicker decisions. Integrated client account makes life simpler. Online account opening opens up geographies with no physical presence. Enhanced trade execution and processing time lowers latency. Advisory tools helps advisors spend maximum time in client interactions and client acquisition. Also, clients first need to possess a certain level of understanding of these analytics tools, in order to interpret them accurately. But implementing these requires time, effort and significant initial outlay, ability to monetise the tools and ensuring consistency in the results. Firms may still need to use a hybrid delivery model as existing clients comfortable with the offline model may be reluctant to shift initially. Client expectations are ever changing and the applications will need to be adaptable to follow those trends. Intelligent analytics and efficient execution can give a competitive edge, although the need for continuous change can erode competitive edge quickly – a key challenge.
This article is meant for information purposes only and does not construe to be an investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. The readers should rely on their own investigations.
A brief about the author
Sourajit Aiyer works in the Corporate Planning team of Motilal Oswal Financial Services – Mumbai where he manages the Investor Relations function. He has seven years experience across areas like business research, financial research, investor relations and equity operations. Motilal Oswal Financial Services (Bloomberg: MOFS IN) is a financial services company focused on retail broking and distribution, institutional broking, asset management, investment banking, private equity, wealth management, commodity broking and principal strategies.