By Liz Collegio, Head of Product Management at Meritsoft, a Cognizant company
Banks scrutinise every fraction of a basis point on the trading desk, yet millions can still leak away through an overlooked cost: brokerage fees.
These fees are an essential cost of trading, but few firms have a clear, real-time view of what they should be paying. That blind spot allows errors, missed discounts and incorrect rate cards to go undetected costing some firms up to $1.5 million more than necessary every year.
We recently conducted proofs of value with several clients to examine the issue directly and demonstrate the scale of the problem. Our studies found that firms were overpaying brokerage fees by at least 3–5%; that the same factors were driving brokerage fee inefficiency across the industry; and that there were sizeable savings to be made through a proactive approach to brokerage fee management.
Most overpayments arise because firms lack timely access to the critical information needed by the right decision-makers.
One bank could have saved around $200,000 annually in interest-rate derivative trading fees simply by routing trades to brokers with more favourable rates. Additionally, almost $400,000 a year was lost to leakages caused by a lack of appropriate data and zero automation. Over a three-month period, one bank flagged hundreds of trades that had notional mismatches or invoice variances.
Over $10,000 of discounts were left on the table because a broker failed to apply them at the end of the month. In several cases, the wrong fee schedules were used. Structured and inflation-linked trades were billed as vanilla equivalents, meaning the wrong fee was applied from the moment the trade was booked. Because these errors sat upstream, they compounded silently through accruals and P&L long before anyone noticed.
Taken together these costs can weigh heavily on profitability. A firm with annual brokerage fees around $30 million is typically overpaying between $1 million and $1.5 million.
Getting what you paid for
Brokerage fees have been a perennial problem for firms because, until now, it was hard to quantify the losses caused by inefficiency. Most firms believed they had a strong handle on their brokerage expense, but these errors can become pervasive, even for firms looking out for them. In one sample interest rate derivatives portfolio, the over accrual rate was more than 25% leading to inaccurate cashflow and avoidable reconciliation breaks.
A large portion of overpayments stem from the complexity of trading fee schedules. They are carefully negotiated with each broker relationship, but afterwards the specific rate cards are not well disseminated. All too often they sit in inboxes and excel spreadsheets or with different departments that don’t handle the day-to-day trading. This causes a lack of transparency intra month, leading to a lack of insight into spending.
Room for improvement
Rate cards are not being kept in a central, digital and readily accessible location. The fee schedules are often hidden or forgotten. Missing, aged or unsigned rate cards exacerbate the problem. Without a validated rate card in place, a firm has little ability to dispute a broker’s charge. This goes beyond a filing oversight and can become a compliance and governance issue. Rate cards should therefore be easily accessible to everyone, especially for those on the execution desks.
Reconciliation also happens at the invoice level rather than the trade level, leading to discounts not being applied and trade mismatches being overlooked. And when those leakages and discrepancies are discovered, it happens too late.
In practice, that means moving towards intraday accrual, with dashboards that give traders and management a view of brokerage spending as it happens.
Across the trading floor, in front- and middle-office functions, there is often no systematic capability to compare rates across a single asset class, region and broker legal entities. There are many areas where basic changes could produce immediate improvements in both efficiency and real substantive cost savings.
For large firms, the potential savings are counted in millions of dollars, while for smaller firms, building an efficient brokerage fee review process now ensures operations can scale as activity grows, with the added benefit of transparency baked in.
This study proves that unchecked costs can lead to sizeable overages. The bumper profits from trading have so far taken the sting out of overpaying brokerage fees. When the trading desk is doing so well, there is some leeway for inefficiency.
But trading is all about increments. Traders care about tick sizes a tenth of a basis point, one one-thousandth of a percent.
The scrutiny of brokerage fees should be no different.
Liz Collegio
Head of Product Management at Meritsoft
Don’t let hidden brokerage costs continue to erode your margins. Get in touch to see how real-time fee visibility and automation can help you uncover overpayments, improve control and convert leakage into measurable savings.
MeritsoftCapMarkets@Cognizant.com
