Incentives needed to close gaps in industry efficiency

Brokers, custodians and fund managers say a lack of industry-wide incentives is slowing the march towards automation.

The financial markets' top leaders agree that a lack of industry-wide incentives for automation is slowing the march toward greater efficiency in the global securities industry, according to the findings of a report released today by the Tabb Group and sponsored by Omgeo, the leading global provider of post-trade, pre-settlement solutions.

Providing incentives for industry-wide automation is therefore becoming vital, the study found, as firms are increasingly focusing on enhancing their internal technologies, leaving external gaps as the greatest hurdle to overcome. Thus, while many firms have made significant progress, the overall efficiency levels they can achieve are limited by their less automated customers and trading partners.

Widespread Agreement on the Key Challenges

By and large there was widespread agreement on the key challenges facing the industry in terms of increasing efficiency.

  • Firms from all segments of the industry believe that the greatest industry-wide efficiency challenges lie in the areas of reference data and connectivity.
  • Brokers and custodians see the need to generate industry-wide priority and critical mass around automation as the single greatest point of pain in their drive to improve efficiency.
  • Owing to the lack of incentives to join industry-wide initiatives, investment managers saw managing their own external STP and connectivity as the greatest challenge.
  • In the realm of custodial communications, custodians, brokers, and investment managers unanimously agreed that the biggest problem was custodians being last on the information chain. Firms in both the US and Europe agreed that this was the major barrier to efficient custodial communications.

The report, "Efficient Markets: Measuring and Monitoring Efficiency in Today's Global Financial Markets," draws on interviews with more than 50 top global investment managers, brokers/dealers and custodians and identifies the spectrum of difficulties that the industry faces as it strives to reach ever higher levels of efficiency in the face of competitive pressures.

As the order flow of trades is increasingly automated, two trends necessitate that firms address the challenge of efficiency: first, customers are looking to execute trades at reduced commission levels, and second, these lower pricing schedules force investment managers, broker/dealer and custodians to retool their cost structure.

Other key findings of the study include:

  • Despite firms' implementation of exception management, there are still a significant number of failed trades, particularly in fixed income, where 7.2% of cross-border trades and 6.4% of domestic trades fail to settle on time.
  • With the SEC considering mandatory same-day affirmation, industry SDA rates require further improvement. Surveyed firms indicated that only 44% of their trades are affirmed on trade date.
  • FIX allocation and confirmation adoption has been slow to develop; only 3% firms surveyed of domestic equity allocations and confirmations were sent using FIX and only 21% of US firms and 37% of European have adopted the standard.
  • In lieu of costly, industry-wide initiatives, firms now prefer to focus on internal efficiency challenges, and look to larger industry vendors to solve external efficiency initiatives.
  • While progress has been sporadic to date, central matching is being considered for adoption by 50% of European firms and 27% of U.S. firms surveyed.

"Our study shows that while much has been accomplished in recent years there is still much work to do," says Larry Tabb, CEO and Founder, The Tabb Group. "It is important to remember that the levels of efficiency that any particular firm can achieve are not absolute, but rather are limited by a variety of factors, some of which are beyond their control, such as the behavior of trading counterparties."

"Omgeo is committed to facilitating not only the dialogue around efficiency but ultimately the realization of a more efficient market," said Lee Cutrone, Global Head of Industry Relations, Omgeo. "We are working hard in cooperation with all of our clients in order to identify opportunities and methods for improvement."

Copies of the Tabb Report are available at

About the Tabb Group

The Tabb Group is a financial markets technology strategy and planning consultancy focused on helping financial services firms, vendors and technology integrators better understand, create, align and execute their business technology visions. Based in Westborough, Massachusetts, The Tabb Group was founded in June 2003 by Larry Tabb, a 24-year financial markets veteran and the former vice president, securities and investments at TowerGroup, until recently a division of Reuters Group, where he managed research across the capital markets, investment management, retail brokerage and wealth management segments. For more information, visit

About Omgeo

Omgeo is the leading provider of post-trade pre-settlement trade management solutions, processing over one million trades per day and serving 6,000 investment managers, broker/dealers and custodians in more than 40 countries. We partner closely with service providers, infrastructure suppliers, industry standards organizations, and our clients to increase operational efficiency and reduce risk for the world's investment management community through STP solutions. With 27 combined years of experience, Omgeo is the result of a global joint venture between The Depository Trust & Clearing Corporation (DTCC), the securities industry's respected utility, and Thomson Financial, a leading provider of financial workflow solutions. Our Board of Managers includes recognized global experts who provide industry oversight and help shape the vision of Omgeo. For more information about Omgeo's STP solutions, go to

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