A Battle Royal: Broker vs. Independent

Date: May 6, 2011

The importance of 3rd Party Pricing Examined

The debate between referencing broker pricing or independent pricing has been raging among asset managers in recent years. Broker pricing is often arrived at through the averaging of assets, which can cause a biased valuation. On the other hand, pricing technologies haven’t kept up with the pace of innovation in financial products, causing an increasing amount of inaccuracy in complex asset security prices, doubling of man-hours, and associated operational risk. This combination has lead asset managers to question what corner of the ring they stand: broker or independent pricing?

Against the ropes

Asset managers commonly rely on data that is from a third party validated source, resulting in the use of partial data sets for complex asset pricing and tunnel vision because of the lack of data independence. This, in turn, increases the risk that the data is inaccurate or based on subjective models. For example, broke quotes are a gamble because they only rely on the internally arrived upon pricing figures without a 360 view. These subjective models lack transparency, preventing asset managers from building complex trades accurately and creating operational risks. These factors have made it that much more difficult for asset managers to take action on data for clients and from meeting regulatory requirements.

The knockout combination

Recent advancements in technology and mounting regulatory reforms have empowered asset managers to seek advanced technologies that allow for better service to clients by referencing independent data sets. Technologies that champion certain features are emerging as kings of the ring. Here’s what those heavyweights offer:

  • Clear-view transparency—now more than ever, firms require a clear view of the risk associated with securities and derivatives. Accessing information from technologies that offer multiple sources for input data enable independent alternatives for pricing, risk and portfolio performance.
  • Anywhere, anytime access—with clients increasingly pushing for information on the fly, web-based and SaaS tools operating in the cloud offer access to view, analyze and report on calculated data anytime, anywhere—permitting business from anywhere on the globe.
  • Access to Greek information—arming a risk department with information for each security which is critical to determining an asset’s sensitivity to market conducts, builds confidence tenfold in asset management’s departments.

The benefits for adopting these technologies for a knockout punch lead to higher margins, reduced man-hours and improved portfolio risk management. By considering independent pricing services that promote transparency, asset managers can emerge victorious in the battle for competitive advantage.

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