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Trading on the Cheap

Traders Magazine, January 2001

James Marvin

Electronic trading is clearly having a profound impact on the financial community. As open outcry shifts to the trading screen, for example, traders are discovering the benefits of speed, efficiency and market access that sophisticated software can deliver. Trading firms are finding ways to add value to client relationships through shared technology. The Internet is indeed giving new meaning to the word "scalability."

What does this have to do with risk management? Everything. Technology has dramatically reduced the cost of trading. That means revenues from traditional services - such as execution fees, commissions, markups and floor brokerages - is less important while clearing is producing a greater part of a firm's profits. Execution fees, or floor brokerage, for example, on the CBOT is as high as $3.00 per round turn for some products, or $6.00 per trade. In the electronic world, brokerage is as low as $.50 per round turn and going lower. In some cases, firms are paying a premium to attract order flow just to get the clearing business.

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