Unbundled brokerage in the age of electronic trading

The futures industry has changed radically since the Financial Crisis. Many of these changes were in process before the Crisis, but the new regulatory environment and the further focus on cost cutting has sped the industry change. Brokerage firms have wanted to further cut overhead and the movement to electronic trading has allowed for massive reductions in personnel. Electronic trading has accentuated and highlighted the unbundling of brokerage services and allowed the cost cutting to occur with volume increases.

In the old world of brokerage, there were many of the services bundled in the course of providing execution. There were networking effects and even though it was not often discussed as a bundled service, brokerage was more than just execution. The voice broker served as a social network for and conduit for these other services.

Brokerage included:

• Execution of actual order
• Market color on what may be driving prices in short-run
• Execution advice on how to manage block or large order 
• Research and strategy advice 
• Capital introduction across client types
• Market gossip and due diligence - who was good and who could be trusted
• Technical support on connectivity

In an electronic world, execution through point and click has disconnected brokerage from the other services that were provided through human. In fact, those other services cannot be provided because the FCM or broker may have little interaction with the client trader.  Now some traders did not want all of these services and in many cases, the broker/provider was not good at delivery the other services. However, there were choices in the marketplace and brokers who were better at offering other services won execution business. Now, all the services are unbundled and may actually be harder to price and purchase. How much should you pay for capital introduction? Market color or gossip? Research? Paying monthly fees for one good idea may seem odd.

Unbundling the broker services through electronic trading has broken the networking advantages from a wider set of services. Investors may get cheaper execution, but they could be at an information disadvantage that is very costly.