Maximizing Efficiency in Broker-Dealers: A Shift Toward Automation

Broker-dealers are turning to automation, but AI needs more risk management and compliance. Traditional software is a reliable alternative.

Fremont, CA: Broker dealers are increasingly seeking avenues to reduce operational costs and enhance efficiency, with many gravitating towards automation solutions. However, the reliance on artificial intelligence (AI) in critical domains such as risk management and compliance still needs to be improved. Despite the remarkable capabilities of current state-of-the-art Large Language Models (LLMs) in synthesizing data and detecting patterns across diverse content formats—like audio, images, and video—fully automating decision-making processes integral to compliance and risk management is still a significant challenge. A notable downside of deploying LLMs in various IT and automation contexts is the incidence of “AI hallucinations.”

Fortunately, there are established methodologies for automating these business functions using traditional automation tools, which are tailored to meet specific brokerage needs and are backed by a proven track record of reliability and precision.

Managing Risk Exposure: Clients engaging in short selling, options trading, or utilizing brokerage leverage expose themselves to potential losses. The definitions of acceptable intraday risk levels and the protocols for curtailing excessive exposure vary among broker-dealers. For instance, broker-dealers may need to escalate customer orders that exceed predefined risk thresholds to a risk desk for review before execution. Other relevant parameters include total leveraged margin, daily realized losses and the aggregate value of derivative products within a client’s portfolio. For those offering derivatives, regulatory compliance necessitates vigilant monitoring of customer risk levels, with broker-dealers needing to implement proactive measures to prevent situations where clients lack sufficient funds to cover losses.

Automated risk exposure systems can effectively identify high-risk clients and their problematic trading activities. Broker-dealers can refine their risk management strategies by assigning tailored risk profiles or criteria to specific accounts or groups, thereby alleviating the risk desk from processing orders within acceptable risk limits.

Post-Trade Operations: Brokerage operations can be entirely automated, minimizing the need for manual interventions. In scenarios like stock splits, reverse stock splits, mergers, or acquisitions, newly eligible stocks can be swiftly added to client portfolios. Additionally, dividends can be automatically accounted for as increases in equity or cash transactions.

This fully automated workflow integrates a broker’s trading platform with their chosen custody, clearing, and settlement venues. The application aligns transaction data from the venue’s Start of Day (SOD) files with those in the client’s trading platform. Trading officers can utilize a custom-designed online user interface (UI) to make database adjustments whenever discrepancies arise between broker data and SOD files. The process can be further streamlined through automatic updates to trading platform records and intra-day synchronizations, simplifying bulk and individual modifications. Consequently, brokerage personnel are relieved from the cumbersome task of manual updates and reconciliation involving outdated Excel spreadsheets.