How do you systematically measure the profitability of your clients and industry relationships? It’s a new concept and a market that Firm58 is carving a niche in. MarketsWiki’s Jessica Titlebaum sat down with Firm58 founder Sam Mele to hear about the firm’s initiatives and to understand how they are leveraging technology to expose the true profits and costs (brokerage, execution fees and rebates, clearing, regulation, etc.) associated with operating a trading organization.
Q: How did you get the idea for Firm58?
I became familiar with the capital markets after working with my father. He was a partner at the clearing firm Goldberg Brothers in the late ‘70’s and early ‘80’s. At Goldberg I held various jobs starting out as a runner and ending up as a clerk on the floor of the CBOT. After graduating college, I went to work for Oracle for ten years and then Ariba for six years. When I left Ariba, I knew I wanted to start my own company and began to look for inefficiencies in the industry I was most familiar with and passionate about, capital markets
I was watching the market evolve from pit trading to electronic trading. Although clearly electronic trading is more efficient, one unintended result is the increased workload placed on the middle and back office. For example, before electronic trading, an order would get executed as a single transaction at one location or execution venue. Now a single order is routinely executed as many transactions on multiple execution venues. While the markets are now more efficient, it has not come without a price. The amount of post-trade data capital markets firms must now process has grown substantially, as evidenced by the constant calls for greater trade data transparency and availability the industry has room for improvement.
I launched Firm58 with Jim Mullen in 2005 to solve the problems stemming from increased transaction volume. Jim and I see this challenge in the forefront now more than ever. The industry is facing regulatory hurdles with Dodd-Frank and the buy-side is requiring more access to trade-level details. Clearly there is a need for solutions that provide transparency specifically around payments, fees and commissions.
Q: How do you think regulation is impacting technology?
Regulation is forcing organizations to process an ever increasing amount of data. To stay competitive and in compliance, firms must become more efficient which leads to leveraging technology in new ways. People alone can no longer manage the daily transaction volume. The industry is being asked to provide answers to a completely new set of questions (Dodd-Frank) which require more detail than any other time in history.
For example, let’s say I am your client and I want to know why you are making the decisions you are making on my behalf. I want to know why you routed a trade to one execution venue over another or I now require you to provide me with a breakdown of fees as opposed to an all in fee. I want to make sure my profits and losses can not only be accounted for but also the rationale behind them and regulation has been the catalyst for these types of client requests.
Q: You call this ‘profitability management’?
Yes, because our solution manages the processes most closely related to the most strategic initiative within companies, increasing profitability. However, we have struggled for terminology to succinctly describe our solutions. Ultimately, we provide unique insight into our client’s clients. We enable organizations to make better decisions based around the processes associated with payments, fees and commissions. We do this by analyzing all revenue streams and all fees associated with a client relationship such as execution fees and rebates, brokerage, clearing and regulation.
After companies understand their client relationships in terms of cost, we can provide them revenue management capabilities. Most firms consider billing to be about creating an invoice and sending it to their client. We view billing far more strategically because a wealth of client information is contained in the data used to create invoices.
Let’s say you want to know who your top clients are within the firm. A lot of that information is stored in your billing and revenue data. Our profit and analysis solution will expose who your top clients are as well as whom your most efficient traders are and what routes are the most economical.
Q: How did people measure and understand their costs before technology enabled this process?
A lot of firms are still doing it the old fashioned way with an MBA and a spreadsheet. That used to work prior to electronic trading and the fragmentation of execution venues; and although we might see some consolidation, I see no indications that fee structures will be simplified anytime soon. In today’s environment, managing expenses needs to be an automated repeatable process. Spreadsheets are neither automated nor repeatable and statistics show they consistently contain errors, but that was the only choice people had until now.
Q: Is this similar to Trade Cost Analysis (TCA)?
Trade Cost Analysis measures the implicit costs of a trade like price improvements and it ensures you receive the National Best Bid Offer (NBBO). We measure the explicit costs. We are going to tell you exactly what the exchanges charge you for that transaction, what the broker charged you, etc. In our experience at Firm58, on-demand visibility into explicit costs, as well as reports detailing the most economic venues, assets, traders, etc. can help broker dealers understand how to not only reduce expenses, but also make strategic decisions about where to funnel order flow.
Q: So, I have to ask, what’s with the name Firm58?
I couldn’t come up with a single word name. Oracle and Nike are great names but there aren’t a lot of words that are truly representative of your company. Since I was familiar with the clearing end of the business and clearing firms are always designated by a name and number; I decided to use that naming convention for Firm58. The word “firm” is a generic term representative of the capital markets and the number “58” is taken from the game of golf.
I don’t get the chance to play golf that often but I love the game. The number 58 is a golf score that has never been shot in a PGA tournament. In that sense the number 58 is aspirational, indicative of Firm58’s constant drive to reach goals once believed impossible to achieve.