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4 Reasons Custom Structure Pricing Needs to Be Automated

Written by Chris Olson on Jan 17, 2019

For all the complexity and sophistication of structured products, the creation and pricing of custom structures in the U.S. remains a very manual activity and one that is surprisingly reliant on emails and spreadsheets for communication tracking and process management. This seems rather incongruent with the financially advanced nature of structured products, yet this is the current state of affairs for the industry. However, with fintech providers aiming to deliver solutions that bring about significant improvements, this approach will soon give way. There are simply too many gains to be had through process automation. Here are four of the biggest advantages that automation provides to custom structure creation.

1) Efficiency

It’s common practice for product or trade desk managers at even the largest investment firms to individually email contacts at issuing banks when requesting bids on a new custom structure. They typically record responses in a spreadsheet which they then use to compare and select the winning bid. This approach may work when you are only custom pricing a handful of products each month, but if market volume continues to rise, as many believe it will, this manual process becomes extremely efficient. There is no way to cost-effectively scale this process, which will cause custom pricing to become a bottleneck activity.

An automated system removes this inefficiency. By moving the bid-request process online, it is much easier for requesters to keep track of the deals they manage, not to mention for issuers to keep track of the many requests they receive and have to respond to. Each user – client and issuer – has an interface that can be used to monitor deal activity and when a product and pricing match is found and agreed to by both sides, the same system can be used to finalize the new structure, including the provisioning of all necessary documents.

2) Price Transparency

Another disadvantage of today’s manual process is the more limited number of issuers that the average investment firm has relationships with. If only a few issuing firms are involved in the pricing process, requesters may not have access to the breadth of products and configurations needed to successfully build their desired structure. Platform providers, on the other hand, can establish relationships with all leading issuers. This ensures greater access to all available products and enhances pricing.

3) Compliance and Control

System-enabled processes are much more effective at enabling the controls needed to ensure compliance within all trades. Offline processes are difficult to oversee because visibility into what is being done, by whom and how is not systematic. With an automated system, all activity is managed and monitored online where requests and approvals are logged, reviewable and recorded. This provides much greater assurance that custom structures are following each firm’s stated guidelines for suitability, risk and compliance.

4) Error Reduction

While no system is completely error-free, manual processes are much more susceptible to human error. When information conveyed in an email has to be keyed into a spreadsheet and then from a spreadsheet into an order entry system, there are too many opportunities for inadvertent errors. An automated system reduces the frequency of these kinds of errors and provides for greater precision in custom structure orders.


Interested in learning more about custom structure creation and automation? Click the link below to learn how investment firms have found a better way to build custom products with Luma Financial Technologies.

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This information is for distribution to institutional clients and is for broker-dealer use only. It is not intended to be distributed to individual retail clients. Any material provided is for information only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument.

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