Asia Agenda

Looking behind the front-office for efficient trading

For Endre Markos, Asia-Pacific regional head of the execution to custody team at Citi Transaction Services, creating efficiency in the mid and back office is the last frontier for driving efficiency in domestic broker-dealer and asset manager trading space. “Operational efficiency will be the sound bite for the next five to ten years,” says Markos. “Custody was an art, but it is now becoming the science of how we can create the efficiency.”

Citi’s transaction services and its wholesale execution services – legally separate entities – have been increasingly teaming up to add a custody proposition to brokerage services, ‘Execution to Custody’. Like its peers, Citi offers lines for Asian domestic brokers to trade non-local markets for connection and execution – an increasing trend as Asian retail clients become ever more familiar with international markets. The differentiator is selling it with a service that helps remove all of the mid- and back-office work. Citi believes other banks may be gearing up to offer similar combined services. Banks such as HSBC, Deutsche Bank and JP Morgan also have substantial custody operations.

Pressures on brokers in Asia are increasing, with brokers now needing to differentiate and find efficiencies for their clients. Kevin Rideout, head of wholesale execution services for Citigroup Global Markets, predicts a range of factors, including increasing capital requirements pushing businesses to ensure capital is spent efficiently, will see international broker dealers reduced to just five or six “flow monsters” in coming years.

Alongside this, the business model of the buy-side is also undergoing transition, and this is impacts the way brokers work with their clients.

“Buy side business models are changing. They used to get paid handsomely by pension funds to manage funds…but now there is a strong move to passive funds,” says Rideout, who notes the increasing use of passive funds like exchange-traded funds. “So if the buy-side is not being paid, then how do they pay the brokerage?”

Markos says “in the last 10 years, there has been a lot of development. But the mid- and back-office has not really benefitted. All the investment was pumped into the algo and execution side. But middle and back office are still very manual, very operations heavy.”

Traders are doing transaction cost analyses, according to Marcos, but the true cost of a trade is often missed; often analysis covers the trade up to the point of execution but misses the impact of later stages – such as trade settlement – missing the upfront risks versus the hidden risks. “Some of this may have led to irresponsible cost cutting,” he says. “There is a need to treat trades as a whole.”

Markos adds that the first phase of Citi’s roll-out in Asia has primarily targeted the domestic broker dealers, and now has 20 on board. A second phase will target regional asset managers. However, he adds local brokers will happily do all their execution with one dealer but asset managers want to share execution among counterparties. Citi estimates clients can save up to 75% of the cost per transaction with savings coming from factors such as not needing teams to handle transaction processing.

Richard Henderson +1 212 217 6916