As the focus turns to risk management, donít neglect the front office
First Published Thursday, 9th July 2009 08:53 am from Automated Trader
All the indicators are pointing to a sharp decline in technology spending in financial markets. That obviously makes maximising the value-add of tech investment an absolute must. Zohar Hod of SuperDerivatives argues that this does not automatically imply allocating all available budget to the back/middle offices. †
Zohar Hod, SuperDerivatives
In its latest estimate of how the current meltdown is going to affect Wall Street IT spending, TABB Group claims that financial organisation IT spending in the US alone will fall from GBP 21.9 billion in 2008 to GBP 17.9 billion in 2009.So solutions which deliver bang for buck and enable teams within financial institutions and corporates alike, to be more efficient, orderly and ultimately profitable are starting to look very appealing indeed.
In many cases, the investment ends up in the back office, often neglecting the sales team which effectively forms the customer interface in the sell-side organisation.
The great irony of the great build vs. buy debate for financial services of the 1990s is that while integration was once beyond painful and consulting costs prohibitive, many financial platforms now offer better ROI and are much easier to buy or implement and maintain than a home grown system.
Now many packaged financial platforms are not only web delivered - a thought many would never have countenanced just a few years back - but are one step ahead of the financial climate, offering workflow, pricing and execution tools which in many cases surpass the internal systems at the banks.
One IT manager at a global bank comments: "Sentiment has changed. It used to be the case that we would never consider using the web to deliver services or hold information.
"Now it's second nature. Security and resilience have improved so much. I think tools like salesforce.com have helped to change attitudes. People began to realise they could integrate a web application quickly, with easy distribution across the enterprise and also tick the security box at the same time."
For the most part, internet delivered tools represent a new way of looking at data and business processes. By supporting data and business process integration under a single web delivered umbrella, web services can better integrate business functions and better manage and scale internal and external business processes.
Put simply, the web dramatically improves distribution, time to market and enterprise expansion and in the current financial environment, this is hugely attractive.
Both buy and sell-side now operate in a world where the sheer complexity and breadth of financial products and reporting requirements mean that ease of integration has to be a hygiene factor, not a bolt-on consultancy cost post-purchase.
The smart vendor in the financial products pricing or trading space distinguishes itself with workflow, risk management and breadth of asset class coverage.
The siloed sales guy is dead - long live the integrated team!
Over a decade, sell-side institutions built and effectively evolved into silo after silo of product departments not talking to each other or sharing technology.
This created both operational risk and a dysfunctional sales process which had the effect of driving buy-side clients to structure themselves in the same way.
Operational risk and client requests have pushed both front office and operations personnel to ask for more multi asset support, multi asset sales coverage and multi asset trading and processing platforms, particularly in complex areas such as derivatives.
Now the search for pure alpha is being checked (and most would argue rightly) by the equal need for effective risk management, effective valuation and workflow across the sales and the trading desk.
Buy-side demand for integrated vanilla and exotic products has clearly paved the way for the multi asset sales person.
No longer can an FX sales executive sell only FX products: structured OTC products include a vast array of fixed income, exchange traded options and futures and many more financial products bundled together. The cry is out for more multi asset risk management and front office support.
Some leading banks have realised this already and are gearing up to either train their sales executives or hire new multi asset sales executives to fulfill this goal. If the ops guy knows how to handle multi assets, so should the front office guy.
Others are buying in tools which assist with knowledge sharing, enhance productivity and allow collaboration between the sales team, the structuring desk and the trading team.
In an environment when revenue protection becomes as important as revenue generation, the more efficient the internal team, the more visible the effect in customer service.
Supercharging the sales team
It will take bold leadership, major technology investments and some regulatory support to get to full cross asset support model. Steps are already been taken by platform providers and some innovative shops on the street to start the integration.
In the derivatives space, SuperDerivatives stands out as offering pricing and workflow across hundreds of derivatives, complex and exotic and delivered over the web.
Yossi Covo, SuperDerivatives said: "Both buy and sell side say that access to liquidity for accurate pricing and risk management remain pivotal but they also need to remain competitive and deliver outstanding service through effective internal workflow.
"Traders and sales desks alike can be painfully inefficient if they can't communicate and capture trade ideas or pricing, particularly when it comes to strips of complex derivatives.
"We've designed our portal to give customised access across interest rates, commodities, FX, energy derivatives so the customer has a consolidated view of their portfolio, backed by independent valuation. This is extremely beneficial in a climate where mark to market pricing is a real concern."
Recent economic events have created the need to value cross asset portfolios independently and that has been in part the catalyst for this kind of integration in the front office. However, many more steps need to be taken to reach an ideal model.
Building a system in house is prohibitively expensive and can burden the institution with ongoing support costs and the need to keep the system updated and relevant to all the new structures in place.
Bring on the integrated and knowledgeable sales team
Clients are also demanding more cross asset support from their sales executive's counterparts. This has prompted some leading technology players to move their cross asset support functionality to the front office as well.
Whoever can train single asset sales executives in the fastest time to market to sell multi asset structures and to manage risk on their products appropriately, will capture more of the sophisticated client flow which provides a sizable percentage of profit. However, training is not the only factor and other tools are needed to enable the seamless support for this new model.
Ask any front office sales executive if he knows much about other assets he is not used to selling and you will most likely get the template answer; "Why should I care about other assets, I am making enough money on what I know how to sell and I can't really manage risk well on products I don't even know".
There is some truth in this statement and risk management including correlation risk remains critical when dealing with multi asset products.
Firms who invest in training their sales executives and their risk systems to handle and understand complex structures benefit greatly but the cost and time investment needed can be prohibitive
Traditionally multi asset trading systems developed by top tier vendors and top tier build shops have mainly focused on trade capture, processing, light risk functionality and some front office trading support.
So what are the factors which drive success? Firstly, seamless integration - IT infrastructures within the sales organisations have been fragmented, or are in silos. The ability to support the front office multi asset sales organisation is clearly dependant on seamless integration to the rest of the enterprise.
Secondly, deal capture from other disparate systems is also key, while integration into downstream processing systems, enterprise risk systems and security master systems needs to be factored in.
Thirdly, accurate market pricing. There is probably nothing more important than making sure the platform provides the sales executive with an as-accurate-as-possible market price for the structure created.
Making sure the price you get from the system comes within a fraction of that quoted to the client by other top tier dealers is priceless.
Here's where independent pricing derived from multiple and diverse data sources really matters.
Clients will feel more secure coming back to a sales executive that gets his prices "right." This obviously also applies to risk management. Good pricing will lead to better risk management and will give both the client and the sales executive a higher level of comfort buying and managing the structure's life cycle.
Although very important, the level of trust in their price will also reduce the need for extensive training of silo sales executives if they feel the system will price the structure correctly.
Risk and basic analytics functionality will not only provide peace of mind to the counterparties but will also give room for new and more exotic structures that could be created on the fly and shared throughout the sales organisation.
Risk reporting is imperative for both management and the sales executive as they can track not only exposure but real-time P&L which will give transparency to the client and enable the best producing structures to become standardised for a larger client base.
Volatility brings opportunity - sales teams need to be ready and equipped
The International Securities Exchange (ISE) reported that in September 2008, its options exchange traded an average daily volume of 4.8 million contracts, an increase of over 60% on the same period the previous year.
That's a lot of extra business, and a lot of clients who need advice, trading support and advisory services from their bank to price, execute and book those trades.
Ensuring bank sales team the tools to communicate pricing and trade ideas internally and with their customers is starting to look like a good idea. Doing so over a low cost delivery model like the web would be even smarter.