Variable trade costs: the last untapped area for cost efficiency

As the economy begins to recover, organisations in every sector are focused on minimising costs. For financial institutions, margin squeeze in wholesale and institutional banking is adding to the pressure. However, despite over a decade-long focus on cost (post financial crisis) there are still real, untapped, saving opportunities.

One of the most significant of these is in variable trading costs paid by financial institutions, such as brokerage, clearing, exchange and settlement fees. These variable expenses, wholly tied to trading volumes, are estimated to amount to more than $25bn worldwide annually, and for a large multinational bank could easily amount to hundreds of millions of dollars a year.

It’s not always clear where in an organisation the responsibility for managing variable expenses falls. But typically, if they are actively managed at all, it’s by the front office and at individual business, desk or trader level rather than through a centralised function. And because they are often tracked manually by people with limited commercial expertise, and/or by a procurement function with limited specialism in these types of costs, this means that any opportunities to make savings or optimise activities are missed.

Forming an accurate view of all variable expenses paid by the business is notoriously tricky, as the costs are often netted into revenue streams, making budgeting and financial reporting even more difficult.

However, we’ve created a technology led solution for clients that gathers relevant internal and external data on trades. Bringing together our sector and technology expertise as well as know-how from our commercial forensic teams, it generates a detailed and granular breakdown of all variable costs incurred across the institution in a clear, easy-to-digest dashboard.

Tooling and data analysis provides regular reports of costs per trade, monthly cost trends and identifies anomalies and areas for review, while scenario analysis allows the client to work out potential savings that could be gained by renegotiation or shifting to alternative vendors.

Better information around variable expenses means more transparency (at a time when regulators and auditors are paying more attention to cost management), greater opportunities for cost efficiency, and better business decisions. Variable costs can be benchmarked by desk or business, for example, and fed into pricing decisions for end customers.

In addition, the data required to provide this transparency is already likely to be available as a key part of other regulatory activities such as Trade Reporting, LIBOR transition, and the cost benefits created could assist to fund these parallel workstreams.

The solution is secure, safe and easy to use – and can be deployed as standalone software or as part of our Execution Managed Services. Variable expenses may be necessary but they are also significant – managing them with the rigour reserved for other costs makes good business sense.