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 Tony Freeman
Director of Industry Relations, EMEA
Nearly four years on and the implications of the 2001 Myners Report continues to permeate throughout the financial services sector. Over the last month, industry and media alike have re-focused their attentions following an announcement by the FSA last month that it will release its long-awaited report on unbundling practices within a matter of weeks.
Since Myners issued his report, there has been broad concensus that a fresh approach to trading and execution needs to be established. From a bottomline perspective over the last few years, steadily but surely, matters such as transparency and unbundling have become central issues firms are grappling with. For the end investors, the prospect of unbundling is a welcome dynamic, increasing both detail and analysis on costs. From the fund managers' perspective, there has been a degree of retiscence, mainly in anticipation of the added costs and administrative burden required to support added transparency. According to the FSA, it is their expectation that fund managers will be accountable to clients through the process of explaining their positions in the context of increased disclosure. Therein lies another potential headache for the fund manager - a notional perception of the paperwork and documentation that will require streamlining and processing efficiently.
Some worrying industry reports have fuelled the belief that fund management firms have under-prepared for the complexity and level of resource required for effective reporting, disclosure and transparency and that they face inevitable teething problems as the onset of unbundling draws nearer. There is a perception that, although many fund management firms have hired rafts of highly skilled and expert research teams, their investment in actual systems lags behind � if the information can't be managed efficiently, any personnel investment is in many ways effectively nullified.
An interesting observation is the change instigated within the industry and emerging new trends. Some firms have centralised their trading processes and developed systems that allow traders to concentrate on their core business activities and securing the best deals. They have developed or procured systems allowing algorithmic trading practices to allow them to scour markets looking for positive pools of liquidity. Direct market access has risen in popularity on both sides of the Atlantic as it facilitates greater control of the trading process with swift low-cost executions. It is estimated up to a third of equity trades are now executed via direct market practices and this looks set to continue, especially with the hedge fund industry proving such a vigorous exponent.
These new trends in trading practices bring greater choice to the marketplace, and as such, a greater focus on unbundling practices, especially by brokers looking to unbundle the ways in which they charge for their services. These trends have created an even more competitive business environment, whereby firms must better manage their costs by examining their trading efficiencies. As more firms adopt new trading practices, like direct market access, they must also begin looking for differentiation based on their processes and how efficient their trading flows are. For some firms, this reality has yet to really hit home and is given, at best, lip service.
At a recent Omgeo event, designed to launch a new web-based allocation interface targeting smaller investment managers, the issues of trading efficiency were acknowledged in a panel discussion featuring four brokers; JPMorgan, CSFB, UBS and SG CIB. The discussion focused on enhancing efficiencies within the trade allocation process and highlighted that, irrespective of new market practices, the efficiency of trade orders, confirmation and notifications must progress hand in hand with the development of new trading and execution strategies. Both are mutually related and the risk firms run on trades which are not confirmed electronically is inclusive to the process of transparency and unbundling � driving efficiency.
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