Zero Marginal Transaction Cost: Securities Trading

Zero Marginal Competitive Cost: Securities Trading

Z/Yen, a consultancy firm, regularly benchmarks investment bank costs, headcounts and volumes to produce costs per trade covering:
FX & Money Market - Global FX, Currency Options, Money Market;
Equity & Debt - European Equities, SBL, Bonds, Repo, Listed & OTC Derivatives;
US Securities - Equities, Stock Borrow Loan, Bonds, Repo, Options & Futures.
According to the cost versus volume curves for Global Foreign Exchange, Global Money Markets, European Processed Equities and European Processed Bonds for the period from 2000 to 2002 developed by the firm, volumes increased markedly while operations costs per transaction fell:
Some of this per trade cost reduction is due to increased volumes being handled at decreasing marginal cost, largely through automation. For instance, the largest equity traders handled around 10M trades per annum in 1999, in 2002 they were handling nearer 25M; for bonds 250,000 trades per annum was large in 1999, now (2002) larger operations process over seven times as much at 1.8M; for FX in 2000, 3M trades was large, now an investment bank would need around 5M to be in the top league. With the “per trade” figure as the denominator, volume matters in getting cost/trade down. The pressure increases for those unable to get to efficient levels of capacity or unable to scale the costs of processes in line with demand. However, larger volumes, poorly processed could well increase costs and investment banking operations are increasingly more professional, increasingly focused on reducing exception, improving controls and risk management.

Cost reduction affects all areas, i.e. operations, operations IT, middle office/product control and middle office IT. In case of FX, cost per trade was just over $11 in 2000, now under $8. The cost squeeze has been felt in all cost components,

Pundits have long forecast the need for investment banking operations & IT to improve their performance markedly. As cost per trade falls precipitously, one obvious question arises, “how far can this go”? Some operations seem to be able to handle increasing volumes with little additional headcount, hitting 55,000 trades per head. Other operations can have as few as 12,500 trades per head. Investments in IT seem to pay off in numbers of trades per operations head, concentrated in the 2001 to 2002 period. More returns on IT seem likely to arrive.


Z/Yen Limited is a risk/reward management firm helping organisations make better choices. Z/Yen undertakes strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (www.zyen.com), such as developing an award-winning risk/reward prediction engine, helping a global charity win a good governance award or benchmarking transaction costs across global investment banks.


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