This is the sixth in our series of seven questions for emissions trading desks.
If your desk trades emissions options and particularly if you are a market maker you will be familiar with the complexity of brokerage on multi-leg strategies. A spread has two legs. A butterfly has three. A condor has four. Some structures have seven. Each leg can be a call or a put, a buy or a sell, with the same or different volumes. And the brokerage that applies to the structure as a whole follows rules that are specific to each broker and often specific to each strategy type.
One broker might charge on only one leg of a spread. Another might charge on all buy legs of a butterfly but not the sells. A third might apply 50% of the standard rate across all legs of a condor. Some rules reference the volume on individual legs relative to a benchmark. The permutations are extensive, and they change when the desk renegotiates terms.
Without system-level automation, the back office calculates brokerage manually in spreadsheets, per trade, per strategy, per broker. For a market-making desk doing thousands of option trades a month across multiple brokers, this is one of the most time-consuming and error-prone tasks in the entire post-trade workflow.
The alternative is an automated brokerage engine within the ETRM that can be configured with each broker’s rule set. The engine identifies how many legs a strategy has, determines which legs attract a fee based on the applicable rule, applies the correct rate, and records the cost against the right trade and the right book on the day of execution. This kind of automation can capture 99% of brokerage accurately without manual intervention.
The downstream benefits go beyond saving time. When brokerage is captured at trade level on the day, the P&L is more accurate from the start. When the broker’s invoice arrives, the back office can reconcile it against what the system has already calculated rather than building the comparison from scratch. And when auditors ask how a particular cost was derived, the answer is in the system not in a spreadsheet that may or may not still exist.
This is not a problem that affects every emissions desk equally. If you trade a handful of vanilla futures for compliance purposes, brokerage on options is irrelevant. But if you are a market maker, or if your desk runs option strategies at any meaningful scale, the manual approach is costing you more in operational overhead and error risk than you probably realise.
Next week, the final question: can your back office reconcile costs against your execution platform automatically?
