Clearing costs for buy-side firms are soaring on account of decimalisation and an explosion in algorithmic trading and ‘dark’ liquidity pools, according to a new research note by financial markets research and consulting firm TABB Group. "Some of the largest asset managers are now spending over $170 million per year on trade processing costs alone, based on as many as 40,000-plus allocations a day, which is dragging their fund performance down," remarks Robert Iati, partner and head of research, TABB Group.
Although traders do consider the overall costs of their choices prior to selecting a specific routing strategy, "it is too much to expect them to bypass opportunities to execute at best price based on the back-office processing costs of the transaction," says the report, entitled 'Buy-side clearing: Launching efficiency through aggregation'.
While at one time the trader was totally reliant on his broker to execute and process all transactions, he has now gained considerable control over his decisions and profitability. With this greater freedom also comes greater responsibility to reduce trade processing costs, points out the report.
TABB Group believes that the most efficient way to reduce the cost of increased allocations is "to implement solutions that aggregate them on the back end." One way of doing this, says Iati, is for the industry's algorithm providers to begin aggregating their trades on central counterparty providers' platforms.
"Buy-side traders' commitment to solving this problem will help stem the tide of the unabated rise in custodial fees, and prevent these fees from having a significant negative impact on their customers' returns," remarks Iati.
Further information about this topic can be found in the upcoming Q3 edition of THE TRADE.