Buy-Side Firms To Brokers: Operational Efficiency Matters

Buy-side firms are spending more money on straight-through-processing efforts and, in turn, are demanding improved back-office operational efficiency from their trading counter parties, according to a survey conducted by London-based consultancy Z/Yen.

Information from the survey, which was commissioned by six European-based sell-side firms, came from 31 buy-side institutions -- many, the U.K. branches of U.S. investment-management firms. Jeremy Smith, director of financial services with Z/Yen says that those firms included asset-management arms of JPMorgan Chase and Goldman Sachs.

Z/Yen defines operational efficiency as confirmation timeliness and accuracy, settlement performance, fails management, interest claims and overall relationship management.

Among the results of the survey was the fact that, overall, the weighting given to operational efficiency in the selection of a broker/deals was 14 percent. In some cases, that figure was as high as 50 percent. Additionally, 68 percent of the asset-management firms interviewed say that they have fired a broker/dealer because its operational performance was "below standard."

"Money managers have, over the last few years, been upgrading their processes and highlighting STP," says Smith, "and with volumes in the U.S. much higher than in Europe, manual screw ups can be even more devastating." For that reason, he says, investment-managers feel they cannot afford to be with an error-prone or operationally deficient broker.

The survey also revealed that fund managers want a single point of contact with the brokers they deal with -- They do not want to call one person to explain a problem and then have to speak to five others as the problem is elevated up the broker's chain of command. Investment managers, says Smith, also don't want to deal with different people for every asset class they trade with a particular broker, preferring that brokers break down the in-house vertical divisions which most have in place.

Smith says that the buy side also wants more communication with sell-side back-office gurus that have much to do with bringing efficiency to the trading process. He says that traditionally, investment mangers weren't overly concerned with back office details, choosing to leave those issues on the sell side, but that is no longer the case. "(Buy-side executives) want to go out and have regular meetings with the head of the back office or customer service to discuss operational performance," says Smith.

Smith is currently gauging the level of interest among U.S. broker/dealers to commission a similar study.

"U.S. (broker/dealers) need to know what their clients want and structure their operations accordingly," says Smith. "To do that they need to meet with clients, from an operational perspective, on a regular basis because screwing up a trades in an STP environment causes many problems."