In my conversations at SIFMA I deliberately asked vendors and consultants how they were helping their clients in brokerage and asset management to cut costs and do more with less.Amidst the buzz at SIFMA about low-latency networks and high-frequency traders, which are apparently still spending money hand over fist, according to the vendors,there are firms that really need to restructure their costs.
I heard a mix of answers, including cautions about the need to balance cost cutting with innovation. Luke Flemmer, managing director at Lab49, a consultancy in lower Manhattan, said his firm was engaged in many projects with bulge-bracket and asset management firms. Currently his firm is talking to several bulge-bracket dealers about developing an institutional dealer platform for their clients.This is a fixed-income cross-asset cash and derivatives platform. Lab49 is using technologies like Adobe Flex and Microsoft Silver Light to build the software in a Web browser with real-time prices, charts and direct clicks to trade via the browser, which doesn't require a software install to support. "This is an exciting space where people are making an investment," said Flemmer.
While cost containment is a reality, Flemmer cautioned against picking a consultant with the lowest day rate. Outlining four steps of analysis that firms should go through, Flemmer said first, the most naïve way to look at consulting is picking the firm with the lowest dollar cost. If it takes the firm twice as long to finish the project, as compared with a more expensive consulting firm, than it wasn't such a cheap day rate, Flemmer pointed out.
The second level is to look at the total cost of the project, including the time it takes to complete the project, debugging and compliance. The third level is the risk-adjusted cost perspective, factoring in whether the consultant will be successful, while the fourth level or most sophisticated level of analysis, looks at the consultant from an innovation standpoint."Smart firms populate their vendor landscape where they can learn something, and choose vendors with ideas," said Flemmer. Some of Lab49's sophisticated clients look beyond cost containment, and are trying to position themselves for an upswing, and factor that into who they partner with, Flemmer said. "The turmoil in the market offered them an opportunity to reinvent how they do business," said Flemmer. Amidst all this turmoil, some firms are able to look down the road, but those who pick the least-cost model,could be short sighted, he warned.
However, some vendors like Hewlett-Packard were eager to help their clients take out costs. "For those on the investment management side or Internet side, where latency is tolerable, you can free up 10 percent of your costs and management costs on those servers could be cut by 20 percent," said Anne Ambrose, worldwide director brokerage trading & investment management at Hewlett-Packard Company, at SIFMA.
Ambrose said there was an overcapacity of servers in the capital markets area. 'You've seen trading come to a halt in all areas of structured products," said Ambrose. And, despite the lay offs of people, firms did not get rid of servers, she said. In some cases the use of servers for trading analytics has shifted to the back-office analysis of "What do we own," said Ambrose. If firms are not using these servers, they need to re-distribute them internally, said Ambrose. Clients have to transform their business models, emphasized Ambrose. To solve the overcapacity problem, HP was being asked to do leasebacks of the servers, to turn the fixed costs into a monthly-cost model, said Ambrose. She also talked about flex computing or computing on demand and some of the new buzzwords, such as "infrastructure as a service" and "compute as a service," which HP offers.
Market data is one of the areas that consultants said they could slash costs out of. Paul Gow, CEO of CJC Limited, an independent market data consultancy based in London, came to SIFMA this year. CJC announced it had been hired by MF Global to manage the upgrade of the firm's market data infrastructure, (Thomson Reuters Market Data System), supporting traders at two of its major sites globally. CJC runs this as a hosted service for Thomson Reuters taking in direct feeds and consolidated feeds. Gow does the same for BT (formerly BT Radianz) and is launching another hosted service in Asia soon through a partnership with West Highland.
Gow said that market data is the second biggest expense after salaries and is one that is ripe for cutting. "We offer a health check and can benchmark a bank's systems at where it is today," said Gow, who heads a team of four consultants who originally started inside Dresdner Bank and then set up their own firm 10 year ago.
"We're going to commoditize market data, like electricity," he added. A standard market data department inside a bank requires three people working from 7:00 am to 7:00 pm and they have to be experts. "We take that pain out," said Gow, who is also offering co-location across global data centers and cross connects between the data centers. He aims to save the banks the cost of building their own data centers. It costs a bank $200 million to build its own data center, according to Gow. Given all the regulatory requirements, including the need to be bomb proof,that may no longer be an option.Amidst the buzz at SIFMA about low-latency networks and high-frequency traders, there are firms that really need to restructure their costs. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio