Innovation in retail broking
One of the interesting questions posed at the Sydney FIX conference was whether there is more innovation in retail or institutional trading. This post does not examine this question but considers behind the scenes innovation in retail broking.
Retail broking is subject to high levels of competition and margins are shrinking. Brokers are looking at how to reduce their costs to maintain profitability. As a consequence, innovation is happening more in business related areas such as infrastructure rationalisation and supplier relationships.
In the past, when margins were large, brokers could take the conservative approach towards the supply of technical infrastructure and tooling: Use the same dominant suppliers and the similar approaches to infrastructure. These were proven and low risk. Alternative suppliers may provide more affordable solutions with a greater emphasis on innovation, however the disruption to the the broker’s business model, including staff training and customer adaption, were not worth the savings. Their margins allowed them the luxury of playing safe.
As brokers seek cheaper solutions, suppliers will need reconsider their pricing model for their solutions. The current pricing model’s are typically focused on usage. For example, price per trade or price per terminal per month. However with cloud technology, IT hosting costs have plummeted and supplier costs are now dominated by engineering costs rather than by usage costs. Also, with the automation of administration and improved User Interfaces, per user administration and support costs are dramatically lower. As brokers look to suppliers to reduce prices, this will eventually force suppliers to more align prices with their costs. Prices based on number of users, trades etc, will probably disappear or reduce to bands.
Is this innovation? It is much more boring than say, AI. However if it leads to cheaper prices for end users, then I firmly believe it can considered as innovation.