Since multi-dealer platforms (MDPs) charge high transaction fees, at least one dealer has started offering more affordable pricing on its own platforms or through bilateral connections, and other dealers are thinking about doing the same. Dealers have occasionally complained that MDP fees can eliminate all profits from a trade. Dealers have long complained that margins have been eroded by the cost of doing business on MDPs, which aggregate liquidity by bringing together market participants.
We believe it is no longer logical to think of SDPs and MDPs as being mutually exclusive. We believe a hybrid SDP/MDP strategy can increase a firm’s digital cost-to-income ratio by as much as 45%, based on our work with clients and other internal research. This is a result of
Reduced price: driven by the adoption of shared technology in fields where functions like trading, post-trade processing, collateral management, reference data management, and client onboarding do not require differentiation.
Increased income: Driven by improvements targeted at areas where they can yield the greatest rewards. For the majority of businesses, these will include investments in exclusive technology that supports unique functions, especially in the fields of research and analytics, sales, prime financing, client servicing, and pricing/trading of structured products.
We recognize that these changes are neither quick nor straightforward. Ageing technology architecture and complex operating models may present challenges for businesses.
We also recognize that investing more in platforms at a time when margins are contracting can be challenging. The default response is to wait and see, but this can be a dangerous course of action. Firms are likely to continue overspending on proprietary technology rather than creating a platform based on a thorough understanding of what makes their bank unique. For instance, a bank’s sophisticated SDP may assist clients in gaining investment insights from customized research and analytics, but this may not be sufficient to alter clients’ habits of checking prices on lean MDPs and trading with the bank that has the lowest price.
We advise businesses to use a hybrid SDP/MDP model because buy-side clients are increasingly choosing among different sell-side providers.
In order to accomplish this, CIOs and CTOs will want to share technology using an MDP that forbids their organizations from contributing anything original to the platform. By using an SDP, this strategy will allow banks to concentrate on the areas where they actually add real value. Additionally, it maximizes their technological investments in a cutthroat market.