Buyside Technology challenges

Anita Karppi, managing director of buyside consultancy K&K Global Consulting, gives a summary of her firm’s findings on the latest industry developments.

Trading technology

Although finding the right safe trading systems and platforms have been long running themes in buyside circles, there have recently been some promising resolutions.

For example, equity traders have been concerned about predatory HFT (high frequency trading), gaming and information leakage for some time. With the recent publication of a ‘certain book’ as well as brokers being exposed to legal challenges around their advertised levels of HFT in their dark pools, there is greater transparency into the functions of their non-lit pools. In parallel, this creates further business opportunities for independent venues and crossing networks. There is a common understanding among the buyside that there will be an increasing amount of block trading in the future and that they will need to have the right optimised tools to ease high touch trading.

Within the fixed income market space, there are now over 40 new trading technology projects in development to unlock liquidity in the OTC market, and this figure keeps increasing. The buyside are now less interested in the details but more in what their peers are going to purchase. There is an consensus that there will be a handful of leading platform suppliers in the future and technology will change the way bonds are traded beyond just the request for quote (RFQ) and central limit order book protocols. Pre-trade, dark trading capabilities are required within the platforms to protect the investors and enable the priority of electronic block trading.

Fixed income traders are also challenged by the lack of pre-trade transparency of available liquidity. This is significantly amplified by the fact that there are too many bond types and a lack of standardisation limiting the frequency and types of bond issuance. At K&K Global Consulting (K&KGC) we are encouraging the industry to convince regulators to regulate the standardisation of bond issuance and narrow the stream of trading which will be in the best interest of the retail investor. While the buyside want to continue trading bonds with the major banks, they are less keen on adapting single broker platforms unless there is some form of aggregation capability to unifythe liquidity from multiple brokers into a single interface.

In FX, there are now a growing number of crossing networks triggering buyside concerns that FX trading is evolving towards the same type of fragmentation challenges as within equities. The buyside are reviewing their choice of order management systems (OMS) and are concerned about the potential hidden charges within the bid/ offer spread charged by the vendor to the brokers. Against this backdrop, compliance teams have become increasingly supportive in the purchasing process of new technologies. Their key interest is in unifying trading across all asset classes into a single trading platform in order to improve regulatory monitoring and reporting capabilities. Whereas the head traders are concerned that such cross-asset platforms will lack the cutting edge features required for best possible results for their clients in each asset class.

Transaction Cost Analysis (TCA)

We have seen an increasing adoption of TCA within equities, but the key drivers and the use of TCA still varies significantly between UK and continental European buyside traders. For example, the internal investment and trading teams in UK-based firms utilise far more of the functionalities of the TCA systems they employ. However, it also appears that some of the available TCA systems for equities don’t actually fulfil the minimum required specifications that we are outlining in our upcoming ‘Buyside Perspectives’ report. One of the mentioned key drivers for TCA across equities, fixed income and foreign exchange are “Client requests”, and we believe buyside firms would benefit from being more pro-active in using TCA reports to demonstrate to their clients that they have a process in place to monitor and review their execution arrangements. There are still uncertainties around how the standard minimum TCA system requirements for fixed income and FX should look like but K&KGC is researching and working with the buyside on a definition which will be published in a separate TCA report.

Across all three asset classes there are varying levels of challenges in accessing the necessary market data. However, we found that wellresourced buyside trading desks have already found a way to resolve some of these data challenges, even within Fixed Income, with their own in-house TCA systems and databases. It is our aim to present such solutions to the wider community and enable vendors to develop systems that can be afforded by less well-resourced buyside trading desks. K&KGC is a buyside consultancy which organises private, exclusive, invitation-only roundtable debates and unbiased, independent peer research for senior and head traders within long-only asset management firms and tier 1 hedge funds. The Alpha Trader Forum (ATF) and Asia Buyside Forum (ABF) debates cover equities, fixed income and foreign exchange across Europe and Asia (London, Paris, Frankfurt, Stockholm, Copenhagen, Singapore/Hong Kong). The Buyside Perspectives research reports cover the most important issues and challenges for the trading desk. They have also built an exclusive buyside only web portal – buysideintel.com.

K&KGC is a buyside consultancy which organises private, exclusive, invitationonly roundtable debates and unbiased, independent peer research for senior and head traders within long-only asset management firms and tier 1 hedge funds. The Alpha Trader Forum (ATF) and Asia Buyside Forum (ABF) debates cover equities, fixed income and foreign exchange across Europe and Asia (London, Paris, Frankfurt, Stockholm, Copenhagen, Singapore/Hong Kong). The Buyside Perspectives research reports cover the most important issues and challenges for the trading desk. They have also built an exclusive buyside only web portal – buysideintel.com.

© BestExecution 2014