As regulatory requirements calling for larger capital cushions on Wall Street hamstring profitability across the trading business, firms are stepping up vigilance of their own P&L statements.

“Capital efficiency is key right now,” said Robert Sloan, managing partner at S3 Partners. “Central bank rules and government regulation are making it necessary for businesses to look at cost, service, and risk, and integrate all of that in their trading strategies.”

Basel III, which proposes additional capital buffers and reporting ratios to the increased common equity and ‘Tier 1’ capital requirements set forth in Basel II, is seen as the most landscape-altering rule set for big banks, who historically have been the biggest liquidity providers in global markets. The new rules, which are meant to be fully phased in by 2019, make it ultra-critical for firms to use balance-sheet capacity wisely.

New York-based S3 provides products and services for investment managers to manage cost, counterparty risk and relationships, and regulatory requirements. Its business is structured across three lines: counterparty risk solutions, collateral and treasury management services, and software as a service.

A common denominator for each business is maximizing clients’ return on assets, which Sloan said is an input to the more commonly known return on equity metric n that “a lot of little ROAs equals one big ROE.”

“Until Basel III started to be implemented, a $10 million client was always better than a $5 million client,” Sloan told Markets Media in an Oct. 29 interview at his office in midtown Manhattan. “In this world, that’s not true. A $5 million client that uses no balance sheet helps me create balance sheet, so that client is a better client than a $10 million client that uses a lot of balance sheet.”

“There’s a very intricate mapping for each client,” Sloan continued. “Because of ROA, clients are really grappling with questions like, What does it do for my business? Do I have enough wallet and resource to support all my trading relationships? What does it mean for me?”

“It’s a real sea change,” said Sloan, who will speak at Markets Media’s Global Markets Summit in New York on Nov. 20.

Sloan founded S3 — named after his father and first-born son, both Stephen Samuel Sloan — in 2003, after stints at Lehman Brothers and Credit Suisse, in businesses including equity derivatives and prime services.

“The idea at the time basically was that the buy side needed financing solutions,” Sloan said. “They had a very hard time managing data, understanding their true wallets, and understanding and measuring how to manage their relationships. They had no way to measure the relative value of counterparty risk, financing cost with data management.”

“We started S3 as a technology and data firm that would deliver technology and data through an outsourced treasury service,” he continued. “Over the past 12 years, we have understood that clients want analytics and productivity backed by a service. So we started out as a service backed by a software, but now the software has become the driver and the service is there when people need it.”

S3 has 27 employees in the U.S. and five overseas. Sloan said the company aims to reach $1 trillion in assets under advisement — the sum of its clients’ assets under management — by year-end.

Client size runs the gamut. “It’s not so much whether you’re big or small, it’s whether or not there is a need within your business to manage counterparty data in a faster, more productive way,” Sloan said.

In June of this year, S3 launched Blacklight, which according to the company “offers counterparty intelligence and analytics to traders, portfolio managers, CFOs and COOs to optimize counterparty risk, cost and services for a Basel-III world.” In October, S3 said it would partner with Portware, a provider of multi-asset trading systems, to deliver Blacklight to Portware customers.

“2014 has been a very good year for us,” Sloan said. “We have executed on a lot of the things that we wanted to accomplish. We made major changes to our infrastructure. We rolled out and made major enhancements to the Blacklight product.”

In late October, S3 won the ‘Best Technology Firm — Client Service’ award from hedge-fund industry publisher HFM; earlier this week, Blacklight was named ‘Best Buy-Side Newcomer’ by Waters Media’s Buy-Side Technology.

“While the S3 service brand is market-leading on the buy side, their SaaS BLACKLIGHT platform addresses data collection, interpretation and analytic needs of this audience,” Victor Anderson, editor-in-chief of Buy-Side Technology, said in a statement. “BLACKLIGHT aggregates multi-asset data, analyzes the cost of all securities, is completely intuitive, and remotely accessible. Its analytics create time and capital efficiency for a deeper understanding of counterparty relationships.”

Sloan said with Blacklight and some products targeted to sell-side banks,  it is “very possible” that S3 can reach $2 trillion or even $3 trillion in assets under advisement before too long.

“We’re using the SAS platform to appeal to almost every single facet of the marketplace,” Sloan explained. “The main thing that clients grapple with is time. What does Blacklight do for them? It creates time. It’s a time machine.”

“Most asset-management firms grapple with how to get all the usable data from spreadsheets. So you can spend most of your time collecting and interpreting data, rather than ‘actioning’ data,” Sloan continued. “We want 2015 to be about clients spending almost no time collecting and interpreting data, and almost all of their time actually understanding big-margin, value-added propositions like ROA.”

Sloan said in the current market environment, a 50-basis-point cost for a hedge fund has the potential to expand several-fold. “Those are not crazy, off-the-wall numbers,” Sloan said.

“If your costs go up by 200 basis points, that may be what you charge to manage money. So where does that come from? Does it come from the fund? Come from you? Come from somebody else? These are very existential questions to the hedge-fund business model.”

Featured image via alswart/Dollar Photo Club