Surging volumes, cost pressures and legacy infrastructure are driving automation in the equity options post-trade space. In a DerivSource commentary, Nick Solinger, CEO at FIA-Tech, explores these market drivers and describes how FIA-Tech’s Atlantis platform can help firms reduce headcount needed for reconciliations and increase accuracy and timeliness in brokerage payments.
In the US, institutional and retail equity options volumes have surged over the last two years in response to the COVID pandemic and other market events. Growing volumes, increasing cost pressures and a desire for improved brokerage payment accuracy, are driving a push for post-trade modernisation in the listed derivatives space.
Manual processing impairs reconciliations and brokerage payments
Unlike in Europe and Asia, US equity options clients often trade using a prime broker or a single clearing firm to centrally manage their collateral and manage margin calls. However, they may want to execute with a wide range of brokers—for example, broker A may have excellent algorithms for a certain type of trading, while broker B has great research. When a firm has all its funds at the clearing broker, but uses multiple brokers for execution, the prime broker will often take care of paying execution commissions to the other brokers, because it holds the client’s cash and collateral.
A common challenge—not exclusive to listed derivatives—is gaps in the data and reconciliations. If a firm has two or three prime brokers, and uses 10 executing brokers, they may have as many as 30 payment relationships, where they are juggling different trades booked with each counterpart. This is onerous for clients to keep track of and if it is not done correctly, the wrong funds may be taken from the account. For pension funds or asset managers, this can cause issues with how they are managing investors’ money.
The historical solution was high headcounts, often at the prime brokers and the executing brokers, to perform reconciliations and compare invoices to trade data sent from the clearing house. However, this was very burdensome—and every penny of cost involved in trading in electronic markets creates friction that diminishes or impairs liquidity.
The push for STP in options post-trade processing
Legacy platforms in the clearing workflow make it harder for the industry to respond to regulatory demands or new challenges and growth in the market, like the recent retail phenomenon in equity options. There is a lot going on in the market and no-touch operations is a side effect of that modernisation.
FIA-Tech’s Atlantis—an asset agnostic platform originally built for futures—integrates with the Options Clearing Corporation (OCC) to automate brokerage payments and reconciliations for US Listed options, providing brokerswith a clear view of which client a trade belongs to, and what fees need to be charged. Automating payments and reconciliations also offers brokers significant cost efficiencies. There have always been cost pressures in listed markets and as products become increasingly electronically traded, the margins become very thin. In today’s environment, every penny really counts.
Automation improves productivity per headcount and account accuracy
There are also labour efficiencies to be realised. In the futures market, FIA-Tech was able to drive a 66% reduction in operational headcount of people touching brokerage across its client base. Some firms saw as much as an 80% reduction. These resources could then be reallocated to other areas where they were needed. As more brokers join the network, FIA-Tech expects to see similar levels of headcount reduction across the options market as the need for manual reconciliations is vastly reduced.
For smaller brokers, however, the larger driver is speeding up the realisation of revenues and improving the accuracy of the investment account. Smaller firms may only have one person handling reconciliations, while their large prime broker counterparties may have a large team handling many such invoices. The Atlantis platform allows the resolution of disputes between parties in an automated way—which helps small brokers collect their receivables from the larger bank prime brokers more quickly.
Some brokers using Atlantis collect 90% of their revenue within 30 days of execution—whereas in asset classes that are not automated, it can take up to 180 days or longer, especially when there are disputes. Resolving those disputes also takes overhead from the client. It could also have a P&L impact if a firm is forced to write off revenues or is hit by expenses from accounts that are already closed. If firms do not solve these problems very close to the trade date, it becomes increasingly onerous to resolve.
STP scorecards to rate brokers against their peers
Looking ahead, FIA-Tech will continue to leverage its position in the trade flow to determine the common root causes of post-trade disputes—be it issues with the way customer accounts are onboarded or disagreements over which rate card is in effect. FIA-Tech is working with the industry to benchmark the underlying reference data to drive further improvements in straight-through processing (STP). Brokers on the Atlantis platform receive quarterly STP scorecards showing how they perform relative to their peers.
The platform has a multi-asset capability and while it is currently focused on onboarding options clients, it will follow client demand into other products with similar brokerage payments, be it OTC derivatives or cash equities, just as it originally expanded from futures into options.
