Sell-side firms focused on listed derivatives markets are increasing investment in the front-office in the wake of increased competition and a bid to improve operational resilience, a study from Acuiti has found.
State of the Market: FCMs Front Office, which was produced in partnership with Broadridge, is based on a survey or interview with senior executives at 38 of the major Futures Commission Merchants (FCMs).
The report finds that, while competition in FCMs’ clearing businesses has remained relatively stable over the past five years, trading and execution has seen a significant rise in competition and fee compression.
At this stage, competition is predominantly seen from other sell-side firms. However, that is expected to change as non-bank liquidity providers expand their reach into listed derivatives markets.
In response, FCMs are focusing on customer service and increasing investment in the front-office with around half of firms increasing their technology budgets this year.
Investment is being targeted in two core areas: consolidation and efficiency and operational resilience.
Over half of FCMs were planning to consolidate front office OMS technology across asset classes while investment budgets were also being directed towards building back-up processes to assuage operational resilience concerns and meet the demands of the upcoming Digital Operations Resilience Act (DORA) in the EU.
The study also found that data integration between systems and technology remained a key challenge for firms as they seek to improve straight-through-processing and reduce manual intervention in the trade lifecycle.
“Competition has been intense among sell-side execution in derivatives markets. This has resulted in significant fee compression,” said Ross Lancaster, head of research at Acuiti.
“With little left to cut in terms of fees, FCMs are seeking to differentiate themselves through customer service and technology. Investment is therefore being focused on both creating efficiencies and enhancing the offering to clients.”
“At the same time, operational resilience is a growing concern – both as a result of incidents of cyber attacks and outages and DORA. These two core trends of efficiency and resilience are driving investment in front-office technology.”
“Front-office investment for FCMs is providing them with a competitive edge in an increasingly competitive marketplace. This study found that FCMs were seeking to achieve operational efficiencies through the consolidation of technology stacks and to compete on their levels of customer service,” commented Ray Tierney, President of Broadridge Trading and Connectivity Solutions.
“Overcoming data fragmentation between systems is at the centre of both of these goals, enabling FCMs to provide more insight to clients while enabling more efficient operations. Broadridge is helping FCMs excel in both operational resilience and customer service across the trade workflow.”
