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Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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February 16, 2007

Brokerage Insights from the FIX Answer Man

By Michael Scotti

The business of consulting to brokerage firms is about to get a shot in the arm. That's the view of Jim Leman, who recently joined Westwater Corporation, a consultancy in the capital markets space. Leman is best known in Wall Street circles as one of the founders of the FIX protocol while at Salomon Brothers more than a decade ago. Leman and a handful of others paved the way for the electronic trading revolution, creating a common language for electronic communications.

The revolution lives on and that's why Leman sees a rising demand for consultancy services: Brokers must be more efficient. Margins are under pressure with the increased use of electronic trading, which is now spreading beyond equities to other asset classes, Leman says.

The double-whammy for brokers is that they must invest in costly new technology as margins shrink. Brokerage firms need answers, he says, because for every problem technology solves, it creates new ones. Consequently, firms have started to put more emphasis on bringing in outside opinions to analyze their strategies. Firms don't have the manpower to do it themselves, anyway, and they lack the budgets to hire more full-time employees.

Leman expects firms to look closer at two areas: 1) ways to cut recurring expenses from legacy systems, which represent roughly 60 percent of their technology budgets; and 2) the profitability of each institutional account on a trade-by-trade basis.

Looking at legacy systems, brokers will ask whether it makes more sense to outsource more technology solutions, Leman says.

For client business, brokers must know the actual costs of high- and low-touch trades, so they can better understand what a client contributes to the firm's bottom line. "The business is going to take on that cost-accounting dimension," he says.