Ben Jefferys, Head of Trading Solutions, IRESS, examines increasing ownership of technology and trading on the buy-side.
A changing dynamic in equities trading is the increasing prevalence of buy-sides taking more control of their order flow. This is largely in response to the need to trade global markets more directly.
This trend is clear for smaller sized orders and orders involving algorithms where liquidity is readily available. (The exception is block-sized trades. Brokers still have active block and facilitation desks. Block-sized crossing pools such as Liquidnet and ITG continue to innovate by providing direct services to the buy-side.)
In the past sell-side brokers have offered value-added services to differentiate themselves such as smart order routing (SOR) and transactional cost analysis (TCA). But buy-sides now don’t value these as much as they did in the past. So sell-side offerings have become more commoditised and the buy-side is taking more control of order routing and decisions about where and when to trade.
Trading is changing and both sides are adapting. New regulations, for example the proposed Financial Conduct Authority UK (FCA) changes regarding unbundling will further drive this trend as dealing commissions can no longer include payment for broker research.
Connections on a global scale
A related theme sees geography and time zone being less of a barrier when it comes to facilitating trading where technology becomes the enabler for the buy- and sell-side. The challenge now is how to connect quickly and efficiently whilst maintaining a sufficient level of availability and redundancy.
For some regions, such as Europe, trading cross-border or internationally has always been the norm. This is not the case in other regions where, for various reasons, technology as a solution to this challenge has been less widely adopted.
This is despite a growing number of options for both buy-side and sell-side to pick and choose the technology that best suits them and break away from some of the constraints of the past.
An example is Australia where the superannuation or pension industry invests substantial amounts each year into the domestic equities market. Because of the ever-increasing superannuation pool in Australia, fund managers are increasingly looking outside the domestic equities market to ensure sustainable returns. The superannuation pool in Australia is currently $1.8 trillion AUD and is forecast to quadruple to $7.6 trillion by 2033. One of the ways that fund managers are seeking alpha outside of the domestic market is through trading more international cash equities. In the past, trading internationally was expensive and those fund managers with an international mandate often outsourced their international trading to a counterparty overseas.
Access to international markets is now more viable because the capital and service cost of technology is lower and the need more pressing.
Technology has also changed the landscape for the sell-side brokers. In particular, technology has made offering services in other markets easier because of greater technology options.
Capacity constraints
To support the functional shift from the sell- to the buy-side, the industry is trying to avoid the limitations of the past, such as an inadequate ability to change their systems to react and adapt.
Importantly, more robust and scalable solutions are being deployed as electronic trading and connectivity matures. The industry has also become much more cost conscious, helping all brokers to remain competitive, reactive and scalable. As an example, bulge-bracket brokers are relying less on in-house trading technology, freeing them from huge development and maintenance costs. This allows the buy-side in particular to outsource commoditised components and focus their efforts on parts of the stack that differentiate them.
In addition, managing connectivity is a major consideration for buy- and sell-sides. It’s critical to be able to access and on-board clients from across the globe in an efficient manner while minimising costs. Only the biggest players in the market have the scale to warrant their own international connectivity networks and dedicated, leased lines remain eye-wateringly expensive when connecting globally. Finding the right blend of connectivity, service and support that fits the business is essential. Similarly shared infrastructure service providers that deliver cheaper access but, like a dedicated line, require each end of the connection to manage what goes through it.
Then there are hub technologies and networks that allow both buy- and sell-sides to access all counterparties via a single connection. These offerings provide global reach and cost-effectiveness and are fully managed.
This is not to say the era of in-house trading technology and self-managed connectivity networks is over as there will always be niches to fulfil. But for many a different model is required to succeed in today’s market.
‘Flexibility’ as a service
All too often the buy- or sell-side finds it difficult to change due to the huge costs of new technology. This is true for proprietary technology and, vendor-based solutions that come with lengthy and expensive contracts. Outsourcing to vendors can bring transparency with regards to costs. But this rarely relieves the buy- or sell-side from the associated costs of deploying and maintaining an outsourced solution. With a higher need for flexibility vendors need to offer products and, importantly, their service in a different way.
Software as a Service (SaaS) – think of it as pay-as-you-go or pay for what you use – for software and connectivity services is becoming increasingly popular. This involves a fully managed service that incorporates software and connectivity.
The result is more flexibility for the buy- and sell-sides, which are no longer limited by previous technology choices. The key is how to efficiently and effectively integrate all the components in the system.
Nevertheless, the outcome is an ability to adopt and scale more quickly and cheaply.
Overall, unlocking new opportunities is driving change for the buy- and sell-sides. Accessibility and connectivity become the keys to success with buy-sides taking more control of their order flow and sell-sides reaching out to find new clients in new regions.
Cost efficient, flexible and scalable connectivity that is reliable has become a key factor in facilitating business across the globe and, as a trend, shows no sign of slowing down.
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Buy-Side: Taking Control Of Technology
