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Use of FIXProtocol in the Back Office may reduce operational costs.

FIXProtocol x TCA

The excellent quality of the speakers, the focus of addressing the analysis of operational costs and Transaction Cost Analysis (TCA), and the alternatives presented at the 4th FPL FIX Latin America Electronic Trading Conference in São Paulo have offered the participants important information for seeking better operational results and IT investment strategies for 2012.

In our market, FPL Latin America is one of the best Capital Market events,” according to Luiz Penteado from Progress-Apama, “as it always includes discussion of the most relevant issues at special discussion panels.” Together, EXTOL and Lasalletech have analyzed the issues addressed by the speakers during the event. We have seen a relevant concern of the participants with regard to TCA and adoption options of the operational tools that allow the improvement of current results.

This year the event welcomed more than 250 participants, many of which were buy-side clients from the Brazilian capital market. The reason could not be different: how to seek new opportunities, reduce costs, and increase business scale. According to the themes of the speakers as well as the interactive participation of the audience, one of the strongest issues addressed deals with the lack of standardized and automated integration between the Resource Manager, the buy-side, and other participants, such as brokers, custodians, stock exchanges, and compensation chambers.

According to Marcelo Figueiredo from Bloomberg, the operators and traders from the buy-side use Bloomberg’s chat services to send orders and carry out business; abroad, where this practice is not allowed, everybody uses FIX integration. It is important to note that both parties using the effective Bloomberg communication channel, which involves links and routers as well as the terminals themselves, have already made significant investments in IT. With this powerful network already in use, the installation of a FIX solution is one of the simplest and quickest tasks we know. In other words, using chat to confirm business is like hiring a broadband link to receive quotes and using a fax machine to send orders throughout the day.

Another important comment was made by two independent brokerage firms that share the same opinion. Gustavo Schahin from UM Investimentos and Rodrigo Campos from Fator Corretora believe that brokerages need to have an integrated view of all business accomplished, to mitigate operational risks and reduce costs. Then, they are able to focus on what really adds value, such as distribution and successful execution. We know the technological packages of these companies, and are also aware that they are very well positioned. They have excellent solutions of robust and stable systems, as well as competent and well-trained IT teams. However, the consolidation of a cash position, checking results in real time together with the close of the market, is one desire shared by all brokerages on the market.

I believe that the current difficulty everyone has lies in the decision about where to invest. The hard, complex task of the participants to become more efficient and offer new services is no longer just a challenge; it’s a fight for survival.

Courage to make innovation can be a good option, but it must be based on the analysis of the TCA spreadsheet. This tip comes from a buy-side client who faces this situation on a daily basis. Luis Faloppa from Schorders comments that, “for each trading team, there is a larger team of professionals in the Back Office. The processes are manual and no standard for messaging has been adopted among the participants of this market – whether they are brokerages, fund managers, or custodians.

We could conduct a simple analysis on this issue of the IT investments to date, which are mostly focused on increasing the volume of orders and execution. The solutions of AlgoTrade, Strategies, and FIX Routers for orders have significantly increased the volume of business executed, but Back Office investments have not been proportional enough to bear this increase.

The investment funds have transferred business management and operational risks to the brokerages. The operations are managed by custodians, which in most cases have been outsourced. The brokerages are hardly paid for execution of business, to make the issue of increase in controllership and operational costs more complicated, harming the services provided and bringing the ultimate consequence of a reworking process to check the operations closed on the previous day.

The strategy for change may be easier and closer than we all think. Suggesting that an IT supplier present a corporate solution that can solve all of these questions is an illusion, not to mention the high volume of investment it would take and the fact that it is not tropicalized. What can and needs to be done, but where there is a lack of courage to face this prospect, is to improve the Back Office services, where relevant results can be obtained in the short term. In this regard, the FIX integrations with the Galgo systems of AMBIMA and iMercado of BM&FBovespa can make a good contribution. Unfortunately, few companies have perceived and understood the advantages of these tools, which could also be a competitive edge.

Present at the event, EXTOL and Lasalletech have mastered FIXProtocol for many years. Together we know exactly how to help in the process for integration and translation between the protocols, focusing on the investments in IT to obtain the best operational results. Almost all brokerage firms have a FIX server installed, with databases standardized by Sinacor. The Assets through Galgo have an available integration service network which has already been adopted by more than 6,500 investment funds.

I ask myself: why do brokerages not offer a Back Office service integrated with clearing houses and their clients? I think they could even charge for this service; after all, this business model would offer better results as well as mitigation of operational risks, guarantee of integrity of information, elimination of duplicated processes, a strategic view of operations, and a significant reduction in operational costs in both of the brokerage firm and also of the buy-side client itself – both of which would be more satisfied. After all, as Daniel Parker of the Estado Agency points out, “the client is always right".

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