Submitted by: Ahmed Javed

Module: BU7060-A-SEM202-202021 STRATEGIC MANAGEMENT

Instructor: Jonathan Corrigan

Introduction:
The securities and financial brokerage industry provides a market for both the initial offering
of the securities and the subsequent purchase and sale of those securities and financial assets
in the secondary markets. The industry makes investment in the securities that are available
to public through a wide range of financial products such as stocks, bonds, ETFs,
Commodities, Fixed Income derivatives etc. The efficient secondary markets created by the
trading activity allows businesses and government entities to raise capital.
Market activities are carried out mainly through two mediums; Exchange Markets and Over
the Counter markets also known as OTC markets.

1.1 Exchange Markets: It is a central meeting place established to facilitate the trading of
various securities and assets. Over the recent years, exchange markets have started to operate
from electronic trading platforms where computers match buyers and sellers. These are
known as electronic based exchanges and more prominent ones in industry are Tradweb and
MarketAxess providing FICC, FICC Derivatives and ETFs1.

1.2 Over The Counter Markets: OTC markets is not a location but it is a communications
network linking dealers that make markets in securities that are not listed on exchanges. An
offer to buy and sell unlisted security is executed by a broker-dealer by entering into a
transaction with a customer, broker or another dealer bank that makes a market in that
security2.

1.3 Global Broker Fees and Billing Department at Bank of America Merrill Lynch
Brokerage Fees and Billing (BF&B) Team at BAML receives Invoices from different brokers
and service vendors at Month End for all asset classes including FICC and Equities LOBs.
BF&B team logs invoices into the internal BAML’s system known as BERTI, reconciles
trades that brokers or vendors have claimed to be executed during the month, validates fees
amounts charged against the bi-lateral Rate Cards and pays out the relevant amounts to the
brokers and vendors. BF&B team receives an average of 40,000 different invoices per year
from over 600 different vendors and pays out approx. USD 700MM per annum in brokerages
and services fees3.

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[ CITATION IG \l 2057 ]
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Figure 2 Yearly brokerage Spend by GBAM and number of invoices
BF&B team currently processes 50% of the total Global invoices on behalf of the BAML’s
GBAM unit and the total brokerage and service fees paid out by the entire GBAM unit is
close to approx. USD 1.5Bn per year4. This primarily includes Voice brokerage charges,
electronic trading fees for the trades done on the electronic platforms, fixed transactional fees
and clearing fees of the trades that were cleared through clearing houses such as CME, LCH
and ICE5. This does not include membership fees for the exchanges, portal fees, terminal fees
such as Bloomberg and Reuters or third party Market Data fees.

2.0 Analysis of Brokerage Industry:

Political Factors:
MiFiD / IMD Directives – The implementation of MIFID II directives in Jan 2018 moved
majority of the trading to an Organised Trading Facilities (OTF) and Multilateral Trading
Facilities (MTF) venues. MIFID Directives have been intended to create price transparency
on frequently traded asset classes which were previously quoted by the dealer banks in OTC
Markets. This is likely to result in an increase in trading activity on the electronic platforms
with an increased competition from smaller broker houses and discount brokers. This also
means that OTC market shares of inter-dealer banks is likely to reduce6.[ CITATION Pet19 \l
2057 ]

Brexit – A risk of no deal Brexit may lead to a macro-economic downturn and a

consequential reduction in trading volumes and revenues for the bank as a whole.
Additionally, the global economic impact of the U.K.’s withdrawal from the EU remains
uncertain and this may result in regional and global financial market disruptions and exposes
GBAM unit to more operational, regulatory and legal risks7.

2.2 Economic Factors

Discontinuation of LIBOR -- U.K.’s Financial Conduct Authority (FCA) announcement that
it would no longer require participating banks to submit rates for the London Interbank
Offered Rate (LIBOR) after 2021 has added further pressures on the bank. The
discontinuance of LIBOR/IBORs rates would result in significant uncertainty in near term
regarding the transition to suitable alternative reference rates (ARRs) and this could possibly
cause disruptions in a variety of global financial markets and may adversely impact GBAM’s
trading revenues due to increased uncertainty as no other ARR has been agreed8.

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BAML Internal Sources through Leadership Town halls talks
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Figure 3 - Top Vendors Expenses for the GBAM units.
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2.3 Social Factors
Brokers as Individuals – Banks utilize broker’s expertise and their specialist skills to access
liquidity and to create markets for price discovery of various asset classes to facilitate their
clients who are institutional investors, hedge funds, asset management firms etc.
Traders rely on the broker as a person rather than the brokerage firm he/she works for
because of their in-depth knowledge of the markets and their personal networks of clients.
This is particularly true when traders want to access illiquid markets such as in Eastern
Europe, Scandinavian or Middle Eastern regions markets. It is often noted that when an
individual broker moves into a different firm, GBAM trader’s orders also moves to the new
firm. This is quite an important factor for the GBAM Business unit as it creates complexity in
managing relationships with both the Brokerage firms and an induvial broker9.

2.4 Technology
The implementation of MiFID directives that require price transparency and transaction
reporting has forced banks to shift over to screen trading platforms such as those of
Tradeweb, Dealerweb, MarketAxess platforms. In order to comply with regulators rules,
Banks have been forced to invest more in their existing technological infrastructure to keep
up with the pace of directives. Additionally, a recent boom in fin-tech industries is also likely
to disrupt current business models of the existing firms by targeting both the Brokerage
Services providers and the Inter-Dealer banks. For example, OTC markets have historically
always remained human-centric but new platform offered by AiX which connects buyers and
sellers directly aims to remove all of the intermediaries acting in between such as brokers and
broker-dealer banks, who currently provide liquidity and access to markets10. This could
potentially become threat to liquidity providers and market makers by challenging their very
existence in the market place.

3.0 Challenges:
3.1 Unable to Track Brokerage Spend
There is no accurate way to track or insights on how much brokerages amounts are the
various trading desks actually paying to the brokers on per transaction and per asset class and
what rates are being used across different geographically located desks. For example, a
GBAM’s Swaps trader in London who is trading 10Y USD Swap with BGC Broker in
London is paying how much versus GBAM trader in Tokyo who is also trading USD Swap
with a BGC broker based in Tokyo. This inability to track spending leads to inability to do
comparable analysis of different brokers. Trading desks are facing increased pressures from
the senior leaders to cut down on their trading costs. Meanwhile, GBAM traders are currently
struggling with inadequate or unreliable information to look at to optimise their annual
brokerage spending.

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3.2 Complicated Rate Cards
Brokerage and execution charges billed to the GBAM units are based on the different bi-
lateral rate cards. The factors determining the brokerage rates are not in a standardised
formats, which makes it difficult for traders and Business Units to do a comparisons of
different brokers. For example, a rate card from a Broker A may list their rates of Corporate
Bonds based on the several layers of Tenors and Quantities11. Meanwhile Broker B for the
same product would have different categorisation of tenors spread across ranges.
3.3 BAML’s Trade Booking Systems Limitations
Rate Cards often mention different rates based on trading strategies vs vanilla trades and
charge rates accordingly. For example a rate for a vanilla USD Fixed-Float IRS is often
different from the rates of a Butterfly or Curve strategy of USD IRS trades. Similarly, FX-
Option traded with a Delta-Hedge would have FX Spot trade booked into the system and
brokerage charged on the FX Option would be different from Vanilla FX Spot trade.
However, by the time invoice bill is received by BF&B team which is often 6 weeks post the
trade execution date, BAML’s internal systems don’t have a mechanism which would
differentiate between the strategy and vanilla trades. This results in BF&B team relying on
broker to have billed correct invoice. If Brokers have not booked these trades correctly in
their systems then the GBAM ends up paying two to three times more brokerage on those
trades.

3.4 Tracking of Discounts and Validation

Discounts are used as an incentive to attract and retain large banks to trade with them.
Brokers offer high percentage of discounts once a certain level of brokerage paid to them has
occurred. This threshold varies for different brokers and is based either on brokerage paid at
monthly, quarterly or on semi-annual basis. As brokers maintain different rate cards for each
asset classes, products and currencies, the tracking and validation of discounts becomes a
very complicated process. This is because certain brokers give discounts on an individual rate
cards while some give discounts based on the brokerage paid to them at a gross level across
all products and currencies. For several large brokers such as BGC, ICAP and Tradition,
BF&B team currently relies on the brokers to incorporate discounts on their monthly or
quarterly invoices. Discounts are the most important element in the Brokerage business
because meeting discount thresholds can reduce costs considerably for the GBAM. Several
brokers give up to 80%-90% discounts once base line thresholds have reached. Currently,
trading desks are unable to keep track of the brokerage spend and therefore are also unable to
utilize discounts correctly resulting in several lost opportunities.

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Figure 1 Sample Broker Rate Card
4.0 Industry Powers and Profitability:
Global Fees and Billing team pays out Brokerage expenses on transactions and services fees
to various third party service providers. These expenses are mainly driven by the trading
volumes of trading desks of Global Banking and Markets division of Bank of America Merill
Lynch. GBAM drives their revenues mainly through market making activities which they
provide to institutional investors, hedge funds and various large corporations. Services
provided mainly include, trading services, liquidity access and hedging strategies. All of
these services require GBAM to utilize services of Brokerage Houses to access markets to
provide smooth and efficient services to their clients.

4.1 Power of Buyers:

Buyers are mainly the clients of GBAM whom it provides trading services. Buyers are
constantly pushing banks to provide execution of orders at the best prices. Additionally,
buyers have also been encouraging regulators to impose more strict directives that would
create transparency in the markets12. As there are many services providers available and the
cost of accessing markets have considerably reduced due to availability of electronic and
screen trading platforms. As a result, buyers’ power to negotiate and reduce costs has
increased considerably in the recent years. These factors are putting more pressures on
GBAM revenues and hence driving down trading desk’s profitability.

4.2 Power of Suppliers:

Suppliers are the Brokerage Houses and trading platforms providers. They have pre-agreed
rate cards which fixes transaction and brokerage rates in advance and last at an average of
one year. GBAM deals with 150 different vendors on a monthly basis across all asset classes,
however, almost 50% volume of transactions is dealt with top 10 brokers and vendors13. High
dependency on the vendors’ particularly electronic trading platforms gives flexibility to
platform providers to pass down costs to GBAM units more easily.

4.3 Threat of Substitutes/Replacements:

Recent advancements in technology and particularly in the field of Machine Learning has
allowed several new participants to enter into the industry who are providing similar services
to meet end clients at a low costs. For example advancements in algorithm trading has seen
many High Frequency trading houses being setup which some institutional investors prefer to
use due to their distinct advantages14. Similarly increase in number of firms offering trading
platforms has also eased access to liquidity to GBAM to carry out their market-making
activities. But on the other hand, firms like AiX which are using AI to develop chat-bots and
Vanguard using its digital advisers may result in a significant game changer for the industry
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Figure 3 - Top Vendors Expenses for the GBAM units.
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as a whole15/16. OTC markets have historically remained human centric and have allowed
GBAM a competitive advantage in this space. But if technologies like chat-bots prove to be
successful to carry out the trading activities this would then potentially reduce costs by up to
50% and would threaten GBAM’s market share considerably.

5.0 Recommendations:
Trading volumes and number of contracts exchanging hands have increased in recent years.
This is because uncertainty and market volatility presents opportunities to investors, however,
increased volumes also poses operational challenges to process and settle trades and
brokerage invoices on time. But as revenues have increased, profit margins have reduced
over the last several years and trading desks are struggling to maintain their increased profits.
This is further evidenced as Deutsche Bank has exited equities business17.
5.1 Digitisation:
The real problem faced by GBAM’s executives is that they cannot fully understand why their
trading desks are not profitable due to lack of visibility on trading costs and hence are unable
to implement required changes and improvements. Additionally, BF&B team needs to have
an increased transparency to see what trades they are reconciling and paying on behalf of all
Business Units.
GBAM LOB’s deal with over hundreds of different vendors across different geographical
locations. There are several different rate cards in place in multiple currencies and asset
classes that have been inconsistently agreed upon over the years with vendors. Secondly, rate
cards are often distributed in emails as a scanned copies from trading desks to BF&B teams.
This makes process very manual and labour intensive for BF&B team and also increases risks
of operational errors.
All of the GBAM Rate cards need to be digitised to have a clear visibility of all broker
agreements in place. It would also allow to timely review the rate cards and negotiate better
rates once the existing agreements come to maturity. Digitisation would also open pathway
for automation of the operational processes such as brokerage validation.

5.2 Centralisation

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As majority of the relationship between GBAM and Brokerage Houses is built on the
foundations of bulk discounts hence, a central calculator is must be created which would keep
a track of all of the brokerage spend and apply relevant discounts once the thresholds have
been met. Secondly, calculator can also be used to calculate and validate brokerage expenses
at an individual trade level. Without a central calculator it would be nearly impossible to keep
track of discounts applicable from different brokers.
Additionally, as GBAM units have several internal legacy systems, a global centralised
brokerage process and would also require to update counterparty identifiers. This problem
normally arises when System A might identify a specific Broker as 123, but another system
has it as A001. This would stream-line all of the internal processes and improve
communications between BF&B and Trading Desks.
The implementation of one central system for brokerage expenses would also increase the
accuracy of validations of the invoices. Standardisation of the process would allow BF&B
team with avenues to automate several operational processes which would help maintain
healthy relationships with the vendors by paying them on time and strengthening broker and
vendor relationships.
Centralizations and digitasion of rate cards would also create more visibility on brokerage
spend by each of the GBAM units and would provide insights on the costs per transactions
through different vendors allowing detailed comparability. Additionally, understanding where
most profits and revenues are made, would allow GBAM executives to focus more on those
relevant asset classes and highlight areas of growth. This would also allow executives to
focus on their end clients needs and grow relationships with brokers which are most valuable
to the GBAM business.

5.3 Standardisation of Rate Cards

GBAM could also explore the idea of homogenizing all of the rate cards across all vendors
and asset classes. This way GBAM units can then only focus on their core trading activities
and wouldn’t need to worry much about maintaining several different fee schedules and rate
cards with different vendors. As GBAM deals with many small brokerage houses who are
highly dependent on GBAM for their revenues, this would allow GBAM executives to
bargain much lower rates overall and reduce brokerage costs considerably. However, it may
be difficult to achieve evenness of the rates with large brokerage houses as the dependency is
inter-connected. Large brokers such as BGC and ICAP provide access to offshore markets
and GBAM relies heavily on them to carry out their core market-making activities. However,
standardisation of fee schedules would increase visibility on the brokerage costs in the short
run but it may prove to be difficult in longer run, as this would require executives to
renegotiate brokerage rates once competitive landscape in industry changes or re-adjusts.

5.4 Fixed Annual Fees

Another proposal which GBAM could analyse is agreeing on a Master Rate Agreements.
Basically this means that GBAM agrees to pay a minimum fixed amount of annual fees per
year to the broker and services providers. Any real brokerage above the minimum level
would be heavily discounted in favour of GBAM. A fixed fee amount can be agreed based on
the historical utilization of services rendered from the vendors. This would allow comfort to
brokerage houses where an agreed fixed amount of revenue would be guaranteed and GBAM
units would have an incentive to trade with brokers who add value to GBAM core processes.
This would also allow GBAM to keep track of their total brokerage spend on a monthly basis.

SWOT Analysis

Strengths (S) Weaknesses (W)

Threats (T) nities (O)Opportu

GBAM's Large size gives bargaining power to In-House technology allows GBAM to
negotiate lower Brokerage Rates improve existing legacy systems

Rising affluent population in US provides new
markets opportunities to GBAM to launch new
products catering this market segment
Low Interest Rate environments could be used
as by GBAM to enter new tapped markets
such as that of China to expand market-
making revenue streams and forming strategic
relationships with new clients
Global presence, resources and talent can be
utilized to digitise and centralise brokerage
process to achieve efficiencies
Acquisitions of new fin-techs allows GBAM
to firmly establish its strategic position and
neutralize threats posed by new emerging
technologies in Brokerage space

Appendix:
Figure 2 Yearly brokerage Spend by GBAM and number of invoices (source BAML internal
system)
Figure 3 - Top Vendors Expenses for the GBAM units. (source BAML internal system)

Sample Broker Rate Card with different tenors

Figure 4 Sample Broker Rate Card

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