With Carlos Oliveira, Electronic Trading Solutions at Brandes Investment Partners, L.P.
There are always numerous pressures on buy-side technologists to update and improve platforms. There are demands for cost containment, there are ongoing regulatory changes to keep technology compliant, and then there are changes that are needed as a result of evolving market structure and requested functionality changes from the trading teams. Each of these is evolving in its own way but all impact the functionality and control of systems and technology.
More pressure to control costs
With high levels of volatility ringing the New Year in global markets, many buy-side firms continued to see a decrease in the value of their assets under management. If this trend continues, technology budgets, which have been tightly controlled over the last few years, should expect an even greater squeeze. In just about every firm, there is a greater need to show a very strong ROI justification before taking on new projects. Projects to meet a regulatory requirement however, will continue to have priority and easier funding.
At time of vendor contract renewal, buy-side firms are being very surgical on what they renew, and more time is been spent renegotiating contracts and licences. Everyone is being very cautious with expenditures.
Legacy and new systems
For years, buy-side firms had a preference to undertake in-house development. Whether to protect intellectual property, a real or perceived lack of suitable options, “building your own” for many was the only way to go. That model has been eroding and combined with advances in technology offerings, regulatory demands and cost containment pressure, for certain systems more and more firms are opting to buy and/or have a vendor-hosted solution, rather than build (and/or maintain) something in-house.
As long as business reasons dictate the need to keep some of the existing infrastructure, we should continue to see a hybrid model where buy-side firms maintain these legacy systems – though providing little or no enhancements – while at the same time giving existing vendors and new players an opportunity to prove themselves. Inevitably, IT departments on the buy-side will continue to get smaller, but will nevertheless continue to be an integral, essential component of the business.
Growing need for data
Small and mid-size buy-side firms rely heavily on the sell-side brokers for street connectivity, algorithmic strategies, and analytics. Extremely competitive, the sell-side firms seek to differentiate themselves by providing customisation to meet portfolio manager and trader needs.
There is a growing trend for buy-side firms to ask their brokers for more data associated with their trade executions. Trade execution data is being used to further understand and quantitatively validate that the algorithm strategy is indeed performing as advertised or requested. With a continuously evolving market structure, the buy-side is increasingly expected to know and understand what happens when an order leaves their system.
As regulation across the globe increases, we can expect some of the data may be combined with other data sources and used internally to help the buy-side meet their own compliance oversight and reporting obligations, and externally to demonstrate that appropriate choices and controls are in place.
That then feeds into the area of standardisation. It can quickly and easily become quite burdensome for the sell side to provide multiple, custom formats and fields. As these requests become more common, there is an obvious need to work out whether there is a way for the sell-side to present data and information in a standardised way. Unfortunately, there is still a great divergence as to what people want to know and so correspondingly a lack of standard will continue for a while.
Sensitivity to regulation
We always have to prepare and get ready quickly to be compliant with the most stringent of regulatory demands because that is the nature of having a global footprint. Ideally, we aim to produce something that’s more encompassing than just the minimum required, and this helps us stay ahead of the regulatory curve.
One example is last year’s SEC proposal for a set of broad rules mandating for mutual funds and Exchange Traded Funds to develop and implement a formalised liquidity risk management program, in order to reduce risks associated with redemptions under certain market conditions. While the final rules will likely change, we began assessing its impact shortly after the announcement and are looking at possible vendor solutions already.
MiFID II and the significant changes it will introduce have been on the radar for many firms. While some team members have been keeping a close eye on the discussions regarding commission unbundling, others are assessing the expanded scope of investment firm’s transaction reporting obligations. Transaction reporting will apply to a wider range of financial instruments, require additional data and impose obligations on firms that receive and transmit orders. The additional one year to comply recently granted is a welcome relief for many.
Fortunately when it comes to new regulation, the affected parties are given the opportunity to voice their concerns. For a firm of our size, more often than not, we can find vendor solutions to help with the technology, timing and resources needed to be compliant. It can be quite daunting nevertheless to get the data and the processes ready to be compliant, and then to continue with its ongoing maintenance. In order to be a global firm in this industry, keeping up with or ahead of the regulatory requirements are a significant but important cost of doing business.
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The State Of Buy-Side Technology
