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Tracking our grey costs per trade: Hidden risks and overlooked opportunities

Barnaby Nelson, CEO of the Value Exchange, explores the results of his research on the ‘costs per trade’ and reveals the industry is missing out on potential opportunities due to a considerable lack of visibility.

Surely after years of practice and refinement we all have a crystal-clear view of our costs per trade – Don’t we? Haven’t MIFID, the global financial crisis and the shift to passive all forced us to learn up over the last 12 years and become experts in tracking our unit costs?

Apparently not. Our recent “Grey Costs per Trade” report, which launches today, has shown that more than half of us in the industry are tracking less than 30% of our total costs per trade each day.

How can that be? On the buy-side, tracking costs per trade are rated 5/5 in terms of importance – mainly to comply with MIFID’s TCA requirements. On the sell-side, 80% of brokers see management of costs per trade as important – particularly as a tool in driving their own competitive advantage. Far from being a dull back-office metric, costs per trade have moved into the front-office where they are now linked directly to brokers’, banks’ and investors’ survival.

Yet, despite this, around 50% of COOs and 25% of CEOs claim they do not see any degree of costs per trade data on a regular basis. In Europe, only 45% of the market is tracking this core metric – leaving more than half the industry in the dark on what is really driving their P&L. On the buy-side, more than half of investors are tracking a TCA-only metric that constitutes just 54% of the costs of a trade – ignoring IT and system costs, staff or out-of-pocket-expenses, for example. On the sell-side, capital and liquidity costs are routinely overlooked, as is the cost of risk, leaving banks and brokers with only a 60%-accurate view of their total costs per trade.

This oversight gets worse when we look to the future. Based on their current levels of cost tracking, investors will fail to identify or track 76% of their future potential savings in the next three years, and the sell-side will fail to manage 25% of their cost growth – on the basis that you can’t control costs that you can’t see.

We clearly have an industry problem here – but what are the root causes of this oversight? With allocated costs making up 42% of the costs of a trade, on average, it is no surprise that organisational silos are one of the biggest obstacles to cost-per-trade transparency. Over 60% of the industry claim that they lack access to the data to be able to calculate a meaningful cost-per-trade metric – either because the data doesn’t exist or because it’s “too complicated” to source. In Asia, the high level of localised, single-country systems further impairs this visibility: leaving numerous data silos across smaller markets and creating additional costs to transparency. People and technology are not only our biggest costs, they are also our biggest challenges.

The risks of this oversight are significant: misdirected resources, poor investment decisions and inaccurate performance rewards. In today’s era of extreme cost sensitivity and competition, these missteps can quickly end up threatening an entire firm’s viability. So, what can be done to avoid bringing the house down?

As intimidating as cost-per-trade management may appear, there is no single right answer and no single golden number for us to aspire to. Visibility is instead a process. It begins with building the right team, with the right access and the right expertise to make sense of diverse data sets across a firm. It then means setting the right definitions: specifically, what tasks and processes are you measuring across business units or markets? Once the action begins, it is about iterating: removing outliers, breaking down barriers and refining the process continually as you delve deeper into the detail of your cost base over time. Above all, it is about targeting specific areas that need attention on an ongoing basis. A virtuous cycle.

And beyond that? Good cost per trade visibility can drive process standardisation, optimisation and even machine learning. Discipline and effort can clearly drive the competitive advantage that all of us seek – but it’s a task none of us can afford to overlook.

If you’d like to dig into the details of our industry-wide survey, please visit thevalueexchange.co/greycostspertrade to download the full report or listen to the experts in our #vxInsight podcast. Or you can contact us at info@thevalueexchange.co if you would like to benchmark yourself or your clients against our survey results.

By Barnaby Nelson, CEO, the Value Exchange

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