Constant Evaluation

P.8 Supp 14

With J.T. Cacciabaudo, Senior Managing Director, Head of Trading and Sales Trading, Sterne, Agree & Leach

In this world of regulatory scrutiny, as well as from a risk management point of view, it’s best for the buy-side to have FIX connectivity, no matter what the cost, with two main consequences. Firstly, there is never an error that cannot be identified as far as the broker is concerned, because if the order is on the wrong side or quantity, it was entered by the client. Secondly, as far as transparency is concerned, the buy-side see every execution: they follow every execution in this world of high frequency trading and they’re concerned about toxic order flow. They want to know whether it is being executed and what size of their order’s being executed in the exact executions.

Because of that, a firm like ours has to factor in a much larger expense on FIX connectivity. The buy-side client has their capital line, the buy-side Execution Management Systems (EMS), and then they have their OMS, the complexity of which will be based on that firm’s size and the expense of the system. Chances are when launching, a firm wouldn’t go for the most complex system. There are a lot more of the smaller networks entering this space to provide differing levels of functionality to the buy-side, and therefore, for the sell-side, the number of providers that they have to connect to and maintain contact with is growing. There are a lot of smaller OMS or EMS providers for the buy-side, and I have to deal with an ever-growing list of providers. Following this the competition started between the internet providers rather than direct FIX connectivity, and subsequently there was pricing competition, in terms of the more connections you send my way, the better pricing I’ll give you. That was a result of the network providers having their fixed costs and realising that they can offer better pricing if I have bigger market share; I’d still make more money because my cost will not increase.

A full time job
As a result, I found myself managing all these relationships, and having to have constant meetings because with each one I wanted to get the best pricing. Basically the biggest expense that I had running a sell-side operation became FIX connectivity. Because of that, I was dedicating a lot of time to it. I could meet with a FIX provider once a day, and then I could try to rework the way my connections were sent based on the next best deal I got. I found myself inundated with dealing with FIX connection providers and it became a significant distraction from my primary responsibility, so we started looking at outsourcing.

And what I realised was that for the amount of money it was going to cost me to have a FIX provider, it was almost the equivalent to hiring someone to do this full time, and in my mind and based on studies and reviews I examined, there were potential cost savings and services that a provider can give me access to that I would never have been able to attain.

The second area is that this provided a value proposition from a regulatory point of view. I had someone that was now monitoring this on a regular basis from a risk management point of view. And it was a lot easier for me to interact with one provider that could represent me, and this one provider had access to more solutions than I did because they were in this business on a regular basis, and they were acting with the end client on a regular basis.

When I evaluate the spend on my income statement on the business that I’m responsible for, I look at it from a Tier 2 point of view. This is not necessarily a fit for a bulge bracket in my opinion because they have much larger infrastructure, a much larger spend, and also they have a much more scaled technology. However when I look at my overall technology budget it drives me to outsource a number of different services and then have the ability to take advantage of knowledge and experience in those firms’ specific fields to realise the technology, rather than trying to work with my own technology budget or internal technology staff. It is far more cost effective when I am willing to consult with the experts in this specific field, and that pertains to FIX connectivity, it pertains to the OMS, and it pertains to data information flow.

A rolling review
How often we change providers and analyse the services we are outsourcing depends on the evolution of my specific firm. If my firm’s revenues grow five-fold and that allows for a larger technology spend, then at a certain point, it becomes more cost effective to bring various pieces of the tech stack in-house.

That’s when firms can maximise the technology services that outsourcers can provide versus what we can do in-house. As a firm we have to be constantly monitoring what is becoming a commoditised offering or function that I need to take advantage of. For my firm, it will benefit us to utilise outsourced providers for some time to come.

Basically, when it becomes scalable internally, it will be worth it for me to bring any given piece of technology in-house.

What I do look for constantly is alternative providers for the technology I have outsourced. I’m always reviewing the providers we utilise and could utilise to ensure that I’m getting, first, the best price and second, the best service.

As I grow revenue in a specific product, I’m looking to make sure that I have the correct technology and capacity for the growth of that business. For example in the options world, we’re slowly adding FIX connectivity for a lot of our options clients. When we were a smaller business, it wasn’t worth it. Our options business has tripled in size over the past five years and now it’s worth it for me to pay more attention to FIX connectivity; that’s going to be part of the service that I’m going to expand and I may want to look to upgrade my OMS and look for the optimal provider based on the size of my business.

When I need a top-of-the-line offering because of the amount of business I’m doing, I’ll buy it, but I think in that 3-5 years, it’s more of a matter of constantly looking at the upgrade cycle and the service providers that I use. It’s an ongoing analysis and a constant conversation to be looking at the different providers and different offerings and different price points.

With contracts lasting anywhere from 12-24 months on an auto-renewal basis, it’s our job to be in front of it, to be on top of it. One of the things is that the bigger we get, we look for providers that offer multiple services, as then I have more pricing power; rather than using six different providers for six different things. If I can get one provider for three of those things, it’s usually more cost effective.

This is a more and more a commoditised business. Execution is more efficient than it’s ever been. Every 15 basis points on income statement makes a difference and I pay attention to it because it allows me to make sure that I have the money to re-invest in my business and keep growing our offerings.

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