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The Trading Mesh

To boost your bottom line, the key is to start in the middle

Wed, 16 Aug 2017 09:19:27 GMT           

By Simon Vincent, Software AG

Banks and other financial trading firms are under constant pressure to improve their bottom lines.

The pressure often is felt most acutely in terms of a focus on operational efficiencies, which only stands to reason as technological progress offers firms the scope to do more with less. But where should those efficiencies come from and how should firms approach the matter?

If we think in terms of front, middle and back office operations, a compelling case can be made for focusing on the middle. Too often firms see technology as a magic wand which, once waved, will magically streamline operations, increase productivity and reduce costs. A strategic technological initiative can be transformative, but for that to happen it needs to be part of a wider, more holistic approach to improving operations. Firms need to consider not only their systems, but also their data and their processes. That is where the focus on the middle office becomes so important.

A large part of what needs to take place in the middle office involves normalization of data, a requirement made all the more difficult because of the different asset classes a firm may trade, as well as the legacy systems it still runs. Middle office processes will inevitably have evolved over time and become increasingly complex as markets and market structures change. That makes the task of understanding the processes that much more challenging.

But once a company understands its middle office processes, it’s in a position to look at how those affect the systems and what changes need to be made to those systems to become more efficient. Where can system integration offer the biggest bang for the buck? What are the main challenges in the current operating model and what should the target operating model be? Process mapping tools can help firms begin to answer those questions.

The rewards for embarking on such a journey are significant. Recent research by McKinsey & Company looked at the degree of digital execution and trade processing at a number of banks. They found that those with the highest level of post-trade digitisation posted four times more trades per full time staff member in the middle- and back-office than the bank with the weakest digital level. Imagine being able to trade four times as much as a rival firm with the same number of staff, without sacrificing the integrity of vital functions such as risk management, security and client service.

It’s not difficult to see why the McKinsey study arrived at those findings. A piecemeal approach to developing and upgrading middle- and back-office systems, which many firms will have followed over the years, invariably means that a large number of functions require manual intervention. The more that a trading firm can automate those functions and eliminate the need for manual processes, the more there is scope for efficiency.  What’s remarkable about the findings is not that there is a business case to be made for digitalization and automation – it’s the scale of that business case.

Technological advances can help firms reap the benefits of those efficiencies. But any modernization or integration of systems needs to begin with a thorough understanding of the processes that those systems currently perform, as well as those they may need to perform in future. And the best place to start? The middle.

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