Back-Office Consumerization & the Evolution of the Broker-Dealer


By Nick Fera, Firm58

The recent closing of the Chicago Mercantile Exchange’s open outcry pits heralds the end of the traditional broker-dealer. High-frequency trading, in-house automation and tightening regulations have been shifting broker-dealers’ responsibilities for years, ushering in a tech-centric culture that pushes B2B financial organizations to catch up to their B2C counterparts in payments and banking.

Success is no longer determined by which trader can shout the loudest, but those able to most effectively take advantage of the industry’s digitization. Increasingly, this means broker-dealers must place a larger emphasis on client service and regulatory compliance to stand out in an era where responsiveness and efficiency are the norm.

Client-Focused Service

The traders of yesteryear enjoyed a position of prestige, wielding comparably more power in client interactions. With the capital markets sector democratized by technological revolutions – not least the Internet, which put competing firms no more than a click away – broker-dealers have been forced to meet clients on their own terms. The SEC’s decision to eliminate fixed-rate commissions in 1975 planted the seeds for more intense competition, but most firms only recently developed the means to compete so intensely on client service. Unsurprisingly, client-side expectations have played a major role in guiding firms to implement technology to better mirror B2C organizations.

Nick Fera, Firm58

Nick Fera, Firm58

Billing systems have been some of the first to adapt to rising customer demands. As the rest of the industry adopts rapid and transparent invoice processing initiatives, broker-dealers no longer have the luxury of waiting until the month’s end to send out statements. At the same time, traders are expected to justify and explain their costs, from itemizing execution fees to unbundling research expenses (as firms in the European Union will soon be mandated to do). Where broker-dealers once dictated these terms to clients, IT innovation has intensified competition and shifted the industry’s focus to speedy, flexible service.

Closely Regulated Conduct

Fairly or not, the public has historically viewed traders as playing fast and loose with the law. Today’s reality is much less extreme. The capital markets have always been closely monitored, but increased regulatory and technological scrutiny has pruned any vestiges of a financial sector Wild West.

While the SEC predates any contemporary broker-dealer, the most significant disruptions to trader behavior came between 1987 and 2010, following Black Monday and culminating in the Dodd-Frank Act. Stricter oversight from the SEC and FINRA, combined with enhancements to red flag detection tools, has driven many firms to implement sophisticated trade surveillance solutions. While complex paper trails once rendered regulatory compliance little more than an honor system, firms today can choose from an abundance of technologies in order to detect spoofing, layering and quote stuffing before material damage is done.

Many broker-dealers have gone beyond legal compliance, using powerful surveillance tools to enforce business policies and foster a culture of integrity. Traders today are increasingly conditioned to assess and avoid risk, paralleling long established trends in the B2C financial space. Empowered by the ability to “collect it all,” broker-dealers can identify and rectify risky behaviors on a per-trader basis, capturing valuable cost savings that help prop up profitability in low-margin environments.

A New Kind of Broker-Dealer

As the financial sector has reeled from both technology-driven and regulatory shifts, the role of the trader has adapted. Where command of the trade floor once marked a successful broker, the new paradigm prioritizes efficiency, reliability and transparency. Driven by ongoing digital innovation, both firms and regulators have redefined the responsibilities (and more fundamentally, the culture) of the modern broker-dealer. Even though these shifts have eliminated certain distinctions that once served as competitive advantages, the capital markets’ transformation has opened new avenues for broker-dealers of all sizes to demonstrate their strengths.

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