Trading Operating Model Risks and Opportunities – Part 2
In part 2 of our discussion with John Read we cover four new topics which supplement part 1 of our chat. Running the trading and post-trade infrastructure is always under cost pressure – but from what directions? How do firms measure whether they are efficient, like measuring cost per trade to process but more broadly. When firms embark on large scale change or transformation, how do staff members react? And of course why not move everything to the cloud?
- 00:48 : What are the cost pressures firms are facing?
- 02:10 : How are firms benchmarking their internal efficiency?
- 03:20 : How do staff react to 'transformations?'
- 04:30 : Does the cloud solve everything?
John Read, founder of Prodktr said "Financial firms have seen both disruption and opportunity during the pandemic. High levels of volatility in trading, complex operating models and work-flow, new FinTech, ageing infrastructure and the industry transformation drive to cross asset simplicity, cloud adoption and cost reduction."
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Bill Hodgson (00:18):
Hello everybody. I'm Bill Hodgson, editor of OTC Space. I'm here today with John Read, founder of Prodktr, an Edinburgh-based firm. Maybe John, you could introduce yourself and the firm, and then we'll get into today's topics.
John Read (00:30):
Hi, Bill. I'm John Read, founder of Prodktr. And thank you for having us. We are a business transformation service provider. We optimise firms' operating models, really to focus on reducing costs and to increase efficiency for the firm.
Bill Hodgson (00:48):
What are the cost pressures in the front office and the post-trade environment?
John Read (00:52):
Let's look at that with two lenses at the moment. From the trading perspective, we are looking at big cost pressures, really driven by platform costs, and then the dispersion of onshore locations in the big trading centres. And obviously as you've seen, smaller, nimble companies that are in a much more dispersed, remote operating model and office space, there's a key cost reduction there. Also the drive around simplification and being able to invest in cross-assets from FX, equity, fixed-income to derivatives into real assets. So, that is a huge cost to be able to transact within those markets. So, that's from a trading perspective. And then on the post-trade, again, we obviously have infrastructure resilience, operations, best practise, and then again, the multiple opportunities around outsourcing, and everyone trying to become a service provider. So all these things lead to opportunities, but also cost pressures. If you are dealing with some of those legacy inputs.
Bill Hodgson (02:10):
What are firms doing to benchmark their trading and post-trade efficiency? How do they know what good looks like?
John Read (02:18):
Benchmarking needs to be informative. It's obviously very common to put polls out there on some of the social channels, et cetera, but I think pure, to really get good insights, you do need to see some factual percentage. So I think, what we're really looking for there is, from a kind of trading perspective, looking at the unit cost for per asset class. So it's quite interesting to see what is the efficiency ratio for an asset manager's equity book versus fixed income versus derivatives? And I think, then also that's the current efficiency ratio and where do you want to be three years and five years? Or what is your investment? So, if you look at large firms or some of the large service providers, they do a great job of tracking where they are versus peer group, and then again, measuring that future success. And then bring that back to the ROI, of the investment.
Bill Hodgson (03:20):
If people go through that, how do the staff at these firms react when they feel as if everything's been thrown in the air?
John Read (03:32):
It's a great question. It's culture. And this takes time. You can't just roll in tomorrow and say, by the way, this is where we want to be, or we'd go into … And the word transformation, a lot of people think, oh, ultimately is cost reduction. That is not, and I think we all know, that's not the right approach. So, you need to bring, from day one, from the top down, the firm on the journey. So you're transforming your operating model, make it part of your heritage, your culture and essentially, make it part of the daily work. So that's really key, absolutely critical, that from your senior stakeholders, to your working groups, to your technical experts, to your technologies, that you've got this habit and this cultural transformation within your firm. Actually, that's something that we spend a huge amount of time doing actually, is working with firms around the culture of what transformation means.
Bill Hodgson (04:30):
In a similar vein then, do people also assume that they should adopt the cloud for everything?
John Read (04:37):
I think cloud adoption is moving at two or three different speeds within the industry. So I think it's become very common within the banks and the service providers, and the tech firms themselves have really driven the cloud adoption, in some ways, quick and fast. I think there are some areas of the industry like asset managers, particularly in the front office trading and compliance, where cloud adoption is moving at slightly different paces versus other areas. So I think interestingly, that's a really good question around infrastructure, middle back office, cloud adoption is very routine now. But if you look from a trading point of view, cloud adoption's certainly slower paced.
Bill Hodgson (05:21):
I guess firms would be more sensitive to having their trading activity run on hosted, on servers outside of the building, maybe?
John Read (05:35):
Well, traders have always had a lot of luxury right until recent years. So often they were the guys or ladies that were driving the agenda. They had big support areas, they had big technology areas supporting the trading desks. And essentially they were calling the shots. That's kind of changed. That's really changed, and really, who is calling the shots, is actually the service providers. So if you look at some of the really big, large technology operating systems, they are moving to the cloud. They're essentially saying to their client book, over the next couple of years we're transitioning to a cloud-based SAS model and the in-housing and those various patches will be retired. So, that's putting a lot of risk and friction into those areas to adopt to the cloud over the next few years.
Bill Hodgson (06:29):
So that must mix up the traditional buy/build decision, because you can buy it on premise, or you can buy it in the cloud? And the two are quite different delivery models.
John Read (06:43):
I mean that there is some great different opportunities there to, you can rewire, you can move to the cloud. It's essentially a game, how does it best fit your firm? And that is why it's so important around the initial assessment, around where you want to review, where you want to be in three, five years? Fully aligned to your investment strategy and fully aligned into your data and operating model.
Bill Hodgson (07:10):
Well, thanks, John. That really is a good insight into what's happening in the business infrastructure.
John Read (07:16):
Thank you, Bill. It's been really interesting to talk to you and cover some of these topics.