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The Performance Arms Race Continues in Financial Services (Part 3 of 3)

In my last blog entry I examined the ROI of performance for financial web sites, concluding that:

 "An even immeasurable increase in trade volume as a result of Akamai performance and reliability improvements can result in a significant increase in commission revenue."

In this final section of blog series I will continue the ROI analysis and look at the impact of performance on the net income of a brokerage firm.

Net Income:
Continuing with the example brokerage firm from Part 2 of the blog, I see on their website that 20 stock analysts cover this firm.  Most of those analysts have an Excel spreadsheet with a detailed financial model, and you can be sure that DARTs is a major element in their model.  How will a change in DARTs affect earnings?

Let's pull more figures from their 10K:
     1)    Net income = $650M (rounded)
     2)    Shares Outstanding = 570M (rounded)

We know that all profit is made at the margin, so what is the profit margin per trade?
   
    Net Income from Commissions   = (Net Income) * (Percent of Income from Commissions)
                                                   = $650M * 45%
                                                   = $290M (rounded)

    Number of Trades per Year    = (DARTs) x (Number of Trading Days per Year)
                                              = 400,000 x 250
                                              = 100,000,000

    Average Profit per Trade     = $290M / 100,000,000 Trades
                                           = $2.90

And how many trades would it take to produce that $290M in profit?
                 Profitable trades = $290M / $12 CPT
                                         = 24,000,000 (rounded)

And how many "profitable" days are there?
                                       = 24,000,000 Trades / 400,000 Trades per Day
                                       = 60 days

Think about this for a minute.  Out 250 trading days for the year, it was the last 60 days that produced the profit.  Ten months of work just to cover your costs, and then only two months to reap the rewards. To be sure, every trade has some costs, but with a highly automated trading system, we could assume that once the fixed costs are covered, each additional trade may result in a profit of perhaps $10.  Let's work with this figure.

Rich B part 3 chart.PNG

And now the questions:

     "How much would you be willing to spend to increase your net income by $10M?"
     "How much would you be willing to spend to increase your net income by 1.5%?"

ROI:
The formula for ROI is:
        (Gain from investment) - (Cost of investment) / (Cost of investment)

Using the approach above, you can select the gain that makes sense to you, and easily calculate your ROI.

Conclusions:
This 3 part blog series was not a quick read.  That's part of the problem with ROI - everyone wants a quick answer but it takes an effort to do the analysis.  I only tackled one of the many elements that could be included in a full ROI analysis.   A similar approach can be taken with Account Opening, Call Center Reduction, Ad Spending, and other items.  The 10K presents much of the data required for the analysis.  Other data must be provided by the firm itself.  This example can be extended to other segments of the financial services industry, or even to other industries.
 
Performance improvement can have a major impact on revenue, on net income, and on earnings.  Investments into products, services, and internal improvement programs that improve your site or app performance can quickly pay off.

Akamai has years of experience in dealing with the ROI of performance improvements.  I invite you to contact me directly with your comments or questions, or if you would like to discuss other ROI cases.

Rich Bolstridge is Akamai's Chief Strategist for Financial Services

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