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The case for the cost-
effective execution stack
Ofir Gefen, President APAC at Itiviti, examines how the evolving
investment and regulatory landscape affect the automated execution
value chain, and why firms need to revisit their IT strategy in
order to seize opportunities early and capture tomorrow.
Why have a cost-effective execu-
tion value chain?
Recent years have seen significant
developments in financial products,
regulation and technology which
have fundamentally changed the
institutional investment landscape
and cost-benefit structure of the ex-
ecution value chain. Investors have
increased the use of passive invest-
ment products (such as index track-
ing ETFs) which in turn forces pro-
fessional asset managers to examine
and adjust their management fees,
responding to competitive pressure.
Then came MiFID II, which forced
further cost-benefit rationalisation
on the use of brokerage services and
specifically research. Both trends
forced professional asset managers
to itemise and rationalise their cost
of doing business, more specifically
the use of commission. This in turn
translated to cost pressure on insti-
tutional brokers both in commission
rates, as well as indirectly through
the ability to “cost recover” against
research analysts’ services previous-
ly sold as part of execution.
At the same time, trading oper-
ations of investment banks and
brokers faced compliance issues
20 // TheTrade // Spring 2019
(e.g. MiFID II, SFC ETD Regs) and
regulatory scrutiny on top of new
capital requirements originating
from Basel III in the aftermath of
the global financial crisis. This has
increased operating costs as compli-
ance departments added more staff
and invested in regulatory tech-
nology. At the same time, higher
hurdle rates were applied to capital
investments, putting IT projects
and client onboarding under further
scrutiny. The combination of these
pressures has forced the sell-side to
adapt and pursue a more cost-effec-
tive execution value chain.
This has fuelled automation and
accelerated the migration of the
traditional sales trading model
(sometimes referred to as a high
touch) to an electronic sales trad-
ing model (low touch). This trend
started in the early 2000’s as means
to improve execution quality and
has peaked over the last five years
as algorithmic execution proliferat-
ed and more brokers have migrated
and merged their high touch trad-
ing desks with the low touch trad-
ing desks. Aided by improvements
in computing power, advancements
in big data analysis and artificial in-
Ofir Gefen, President APAC, Itiviti
telligence (AI), firms can not only
reduce cost and increase efficiency,
but also successfully manage an
increasingly complex regulatory
environment and the proliferation
of new execution venues.
This first wave of automation of the
execution value chain is now largely
matured and we are about to enter
the second phase: the outsourcing
of commoditised components.