At the end of last week, there was little surprise when a report commissioned by the EC claimed that trading costs in Europe remain high. According to the report, these costs can be mainly attributed to the current trend of brokers splitting orders into several transactions in a quest to reduce market impact therefore resulting in a greater number of overall trades on which fees are charged. In addition, high clearing costs are to blame, where clearers, despite having cut fees in the past year, have not passed this cost-saving on as charging per transaction has continued.
While the report sheds light on the front office and clearing and settlement inefficiencies contributing to Europes high trading costs, it omits the inefficiencies in the middle office. Last year, using the same research house, Omgeo conducted a study on the middle office and its contribution to the cost of European trade processing. The Oxera report showed that through automating the trade verification process, costs and risks could be significantly reduced. Further, the report demonstrated that if a trade is verified on trade day the costs borne by investment managers, broker/dealers and custodians in the trade verification process could be reflected in lower process, and therefore, lower transaction costs for end investors, as well as other benefits such as reducing counterparty risk.
The automation of middle office processes such as trade allocation and confirmation could go along way towards reducing the high trading costs which have longed plagued the European securities industry. Moreover, new initiatives for the middle office, such as Omgeos proposed launch of a tri-partite trade matching and netting service between fund managers, executing brokers and custodian banks may reduce even further the total cost of trading. If such middle office initiatives were to be combined with reduced clearing and settlement costs, finally, a serious dent could be made in Europes high trading costs.