Banks Struggle To Optimize Brokerage Spend


Heads of trading desks at the major financial institutions are spending hundreds of millions in brokerage fees every year, according to analytics and regtech firm Meritsoft.

In over the counter markets (OTC), large banks are paying in excess of £100 million per year for brokers to facilitate transactions with counterparts across multiple desks. Banks can of course negotiate rates with their brokers. However, often the issue is that most have, until now, failed to find an accurate way to track and validate exactly how much they’re paying them per transaction and which rates are being used across desks, and across different units of the bank.

Research showed factors behind the inability to optimise include banks struggling to overcome long standing headaches, such as inadequate information, not being able to account for discounts, and a lack of comparability into how brokers charge for the same service. As heads of trading desks face mounting pressure from the boardroom to drive down the costs of working with their brokers, they continue to struggle with inadequate information to help optimise their brokerage spend. The inability to compare execution cost on a like for like basis between brokers due to inability to apply discounts, group strategy, structured deals and standard charging methods up to now has not existed.

Commenting on the findings, Kerril Burke, CEO of Meritsoft said: “Banks trying to identify potential savings between two brokers is the equivalent of someone trying to compare the difference in mobile phone rates between different plans on Vodafone and O2. The total amount of money a bank spends on brokerage could potentially equal, or even exceed, their everyday costs of processing the business.”

The findings also showed that omission of links to indicate different trading strategies, multiple different risk systems in which the information resides, and missing static data which further complicates the ability to account for brokerage fees on a daily, as opposed to end of month basis.

Burke added: “The problem for banks is that brokerage transactions costs are only typically reconciled vs the rates once the bill arrives, which comes in up to six weeks later, and in most cases even longer after the execution of the trade, in some instances. Additionally, reconciliations can be as limited as a tolerance check against previous period invoices.

“If this wasn’t enough, if a head of desk can’t identify the specific type of trading strategy, then there is no way of the bank knowing which rates to apply. By the time the trade reaches the back office, all the broker sees is one element to match on from the other side of the market. If the broker has not booked these trades correctly and treats them as vanilla deals the bank ends up paying two to three times more. To avoid this from happening, banks need to ensure they have the right systems and processes in place to accurately calculate and validate the charges for the actual trades executed.”

Source: Meritsoft


Related articles

  1. From The Markets

    RBC to Acquire HSBC Canada

    The deal combines HSBC Canada's strength in international products with RBC's breadth of capabilities.

  2. C.S. Venkatakrishnan said his prognosis is excellent and his condition is curable.

  3. The agencies found a shortcoming related to data quality and data management.

  4. Goldman Sachs Asset Management agreed to pay a $4m penalty.

  5. Credit Suisse’s strategy is good news for its 2,800 employees at Madison Avenue

    Investment bank has been impacted by industry-wide slowdown in capital markets and reduced sales & trading.