Broker Dealers play an important role in the private capital markets by facilitating the movement of capital in the often illiquid private capital markets. Between globalization of markets and the changing investment landscape, however, Broker Dealers have been left with the same antiquated tools to service a substantially more complex world.
New distributed ledger and artificial intelligence technology can help Broker Dealers revolutionize themselves by digitizing operations and compliantly automating the cradle to grave investment management process.
What is a Broker Dealer?
A Broker Dealer, or Exempt Market Dealer, is an entity that is engaged in facilitating the purchase and sale of securities on its own behalf or that of its clients. In the financial industry, Broker Dealers perform many essential roles. These roles include but are certainly not limited to: providing clients with investment advice, providing liquidity through market-making operations, facilitating trading activities, publishing investment research, and raising capital for businesses.
Broker Dealers can range in size from single individuals and small independent boutiques to entire branches within commercial and investment banks. The latter will almost certainly be managing complex and sometimes convoluted capital raising and investment management processes on behalf of its deep bench of clients.
What are the primary pain points for Broker Dealers?
Broker Dealers often face various challenges which restrict their ability to efficiently manage operations and processes. A few notable pain points include:
Broker Dealer reporting in many institutions is subject to heavy regulatory requirements for data transparency and process consistency. That in and of itself is a challenge because it is labor intensive to produce compliant reporting. However, the vague and evolving interpretations of the compliance rules (such as those relating to consumer security under SEC Rule 15c3-3, net capital computations under SEC Rule 15c3-1, and relevant monthly reporting included in the FOCUS report) make the challenge that much greater.
Compliance challenges have become pervasive throughout the operations of most Broker Dealers, thus increasing technology spend, obstructing corporate strategy, and substantially extending work hours (and levels of frustration!) for the individual representatives dealing with all the additional paperwork.
Direct funds are mutual fund schemes that are offered directly by the fund house or asset management company – no third party, distributor, or agent is involved. Investors deal directly with the asset management company that is offering the fund.
According to a recent survey by FundKeeper, which was comprised of senior officials at 28 advisory firms, most respondents were familiar with the following pain points:
The prevalence of direct-at-fund accounts at Broker Dealers
Each respondent firm allows its representatives to open accounts directly with fund families, a collection of assets that includes more than one asset class. However, 14% of the participants said they would limit the practice based on the type of account or the fund family they invest in. Upon being asked what percentage of customers have one or more direct-at-fund positions, half of the respondents admitted that 50% or more of their customers do while one in five said that 25-49% of their customers have direct fund positions.
The inefficiencies of direct-at-fund accounts
68% of respondents in the FundKeeper study cited broad inefficiencies in working with multiple fund families as well as issues aggregating and synthesizing the non-normalized data gather from the fund companies.Two in three respondents further cited inefficiencies in opening accounts. The process remains highly manual and error-prone with paper form shuffling and snail mail delays, making the entire experience a painful compliance nightmare.
What opportunities can Tokenization provide to Broker Dealers?
In the financial markets, the distributed ledger offers an integrated ecosystem where a digital unit or token can represents each and every real-world asset. That token can be used and transferred far more effectively than any physical asset, thus presenting an opportunity to provide 24/7 liquidity and near-instantaneous settlement alongside transparency and immutability.
By allowing asset trading around the clock, both Broker Dealers and Investors will have the opportunity to act promptly on new information.
Trades executed via Blockchain will automatically settle within a couple of minutes rather than several days which translates to less work for Broker Dealers.
The use of Blockchain Technology enables Broker Dealers to significantly reduce operating costs and focus more time and capital on revenue-generating operations.
Liquidity & Market Depth
As investments are tokenized and transactions recorded on the blockchain, Broker Dealers can, without fear of redemption, continue to enable investment in illiquid assets, while the Investors can access liquidity via the secondary market.
What notable Broker Dealers have already begun to integrate Blockchain into their operations?
AmerX is an investment bank and a provider of execution services. They are a member of the New York Stock Exchange and a Broker Dealer registered with the SEC and FINRA.
Coinbase is an online merchant, a Broker Dealer, specializing in assets dependent on Blockchain. Not only does their industry-leading platform provide the opportunity to purchase, sell, and exchange, but it also offers educational opportunities for investors.
Dinosaur Financial Group is well-recognized by the SEC and various other regulatory bodies such as the NFA, FINRA, and SIPC. Through its partnership with tZERO, the group made its entrance into the blockchain environment and secured its relevance in the shifting Broker Dealer landscape.
What is the implication of having all Broker Dealers issuing securities via Blockchain?
Broker Dealers often lack the ability to custody assets themselves which is a bottleneck for security issuance, distribution, and liquidity. While Blockchain does not directly solve the custody dilemma, it does provide a new means of self-custody. Further, as major institutions such as BNY Mellon continue to move into the space and offer custody solutions, the network of Broker Dealers issuing securities via Blockchain will transform the market. Trading and settlement times will be reduced to seconds, liquidity will be more comparable to the public markets, operating costs on all sides will be drastically reduced, and transactions will be recorded on an immutable ledger for auditing.
How Is MetaFinance Making A Difference?
MetaFinance is bridging the gap between traditional and digital finance by offering a customizable and configurable securitization platform that automates administrative tasks, helps businesses collaboratively issue digital securities, and provides in-depth analytics while offering a secondary market infrastructure with near-instantaneous clearing & settlement.
Interested in a demo? Contact the team here or reach out via email at firstname.lastname@example.org.