Mostly… fixed income and cross product eTrading

October 18, 2006

Holky’s rules…

Filed under: 2015, etrading — holky @ 2:37 pm

A new example (from efinancialnews – Deutsche Bank has dropped 12,000 clients around the world as part of its strategy to focus on the most lucrative companies…) of banks getting more choosy over who their counterparts are, lead me to start stitching together some of the threads in “Mostly”, from which we now reach the first tranche of “Holky’s Rules” below — served with a ;-^

The “90% of traders/sales to lose their jobs”  rule:  Ensure your (expensive) people are servicing “strategic” business that genuinely adds value….   Ok clear enough. But what can you do with the rest of what you do?

The “Did you not know it’s an electronic revolution?” rule: …ah, scale the machines so they can service the rest of the customers in the rest of those flow products…. with scale, the marginal cost for processing all those the ‘extra’ trades makes this a revenue opportunity. But of course you’re soon going to find the next rule…

The “But of course you have to actually use the technology” rule: ..actually you have to reposition your people to ensure your e- customers are really using the technology available, to deliver true zero touch execution and processing, as you can only genuinely scale once your people don’t need to type or touch the trades to help them through.

The “Lets open the doors to (just about) all” rule: get the machines in place, focus some of your e-savvy people on getting the tail e- customers onto the end of your electronic offering with no voice coverage, and expand your client base like crazy to maximise the flow coming through.. then monitor what’s happening, preparing for…

The “Never eat anything bigger than your own head” rule: (also known as “are they cleverer than me?”):  if any predatory e-client is demonstrably costing you money on their trades, you need to switch them off immediately, and if they have used all their lifelines then terminate the relationship. Of course this is not a new concept, perhaps particularly in the FX world where the blurred edges between price maker and taker, and where predatory accounts with good (or maybe even great) technology are in a position to pick-off your quotes in the market. It’s elsewhere too, though still to a lesser extent – so far.

I never said these rules were new. I just wanted to point out that this is pretty much where etrading 1.0 has been for many years. Or more accurately, where it’s been aiming, as it’s organisationally very difficult (see “90%..”), technologically and operationally challenging (see “..electronic revolution..”), and is by necessity educational for those trading with you electronically (see “But of course you have to use..”). But even with all of that, I believe most (yes only “most”, re post about BMA conf) banks were starting to get their act together in terms of quantifying the value they get from etrading 1.0, and even in some cases establishing their USP on etrading.

Regulators enter stage right (cue orchestral stab in the background, post here), to focus even more time and effort on measuring true transaction costs. Which leads to an ability and appetite to measure true value captured from each transaction and each relationship too. This obviously isn’t applied to just e- , so even outside of the e- space there’s turbulence as increased transparency of costs and value from particular relationships is enabling banks to work out what they should be doing going forwards (eg. news I lead in with) rather than doing some of everything as long as the till fills throughout the year.

Turbulent times. But you’d be mad not to expect turbulence on a journey through to the 2015 visions from IBM trader is dead and Sean’s AmazonBay (posts here).  But even though Holky’s Rules remain broadly the same as above, a rapidly changing landscape (posts on shockwaves and liquidity hub), dramatically improving technology and appetite for technology improvements on buyside (post here), hedge funds blurring the edges of buyside/sellside, banks blurring the edges of banks/hedge funds, amidst an ongoing ravenous appetite for alpha, is bringing different participant types and product classes into a single view. This brings it’s own challenges as the different operational models and order types of the legacy single-product-set electronic markets converge. Etrading is no more about just the electronic transacting of voice trades, it will drive a fair chunk of the change well see in capital markets over the next few years, and the trading mindset will need to change (post here) in order to surf the wave that’s coming.

Welcome to etrading 2.0.


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