Buy Side + FinTech + Big Data = ?
By Nicholas Greenland, Managing Director, Global Head of Broker/Dealer Relations at BNY Mellon Investment Management
The rapid evolution of technology and the surging availability of datasets, means that assessing and choosing which products and firms to work with can be overwhelming, so industry cooperation is essential.
Asking people on the buy-side about Fintech – more specifically big data and machine learning – and its potential application to their business elicits a broad range of responses ranging from excitement and existing involvement, to frustration and the lack of belief that opportunities can be grasped.
I believe that the buy-side can be split into three pockets: those who believe there are great opportunities within big data and machine learning, those for whom it’s “just not in my business” and those who struggle to understand how this new technology can be relevant to them.
Summing up some of these challenges, Mahmood Noorani, founder of Quant-Insight, recently said: “We need to understand the question that we are trying to answer, not try to reverse engineer the question from the answer”. For many, such experiences have been quite the opposite, so the ability to both bridge business challenges and understand and deliver technology has never been more valuable.
Stepping back, the core belief (and at times, hope) articulated in conversations with buy-side peers is that alternative datasets and the evolving FinTech space can offer value by addressing not only our trading and investment management requirements, but also our clients’ needs. With this in mind, the broader issue is actually about identifying the right questions that need to be answered, searching for the right answers and then understanding how to execute on what is now possible.
This is against the backdrop of industry evolution, where some are now looking at whether the sell-side model of high-touch and low-touch trading makes sense for us. For the buy-side, the former is the focus for trade advisory/value creation (for example, research-led cross-asset liquidity consultancy and derivative implementation ideas) and the latter is more focussed on streamlining and scaling execution coupled with research (for example, how best to aggregate fragmented liquidity). Regardless, both approaches need to lever technology to meet their full potential.
With these business drivers and with MiFID II stimulating changes in technology and trading processes, the question for many is: what else can we do to optimise and expand upon what we have? For example, do we need an execution management system (EMS)? If so, what is the best implementation strategy and technology solution?
The main options currently being discussed include adopting cross-asset platforms from an existing firm, an amalgamation of best of breed platforms, or leveraging container-like technology to create one’s own “trading app store”. The latter allows a bespoke cross-asset trading workstation to be delivered using components from separate providers and seems to be gaining mind-share as it promises greater levels of customisation above and beyond what is normally attainable.
It also allows for a flexible “swap in and out” of components as technology evolves and potential for faster delivery of solutions as these become available, for instance, as some sell-side firms look to expose some of their tool-sets. This is against the backdrop that few asset managers, with notable exceptions, consider building their own technology as being a true differentiator.
Regardless of the approach: do implementing new trading tools mean that all the questions will have been answered? No. The broad themes of data and tools for pre-trade and in-flight decision support (which may or may not be within an “out of the box” EMS), and other functionality to assist price formation for those wishing to be price-setters on all-to-all venues, will keep many on the buy-side focused internally for some time.
Looking externally, the question is actually what should and can we be doing together as an industry. I think there are two main areas:
Firstly, given the rapid evolution of technology and the surging availability of datasets, assessing and choosing which products and firms to work with can be overwhelming. This is where the industry can work together through trade bodies, in partnership with specialist investment firms or with larger sell side firms, all of whom can curate such conversations for their own members, clients and partners.
By leveraging such organisations, the buy-side has the ability to hone in more rapidly on the Fintech firms that are ready to engage with sophisticated financial institutions, have correctly articulated opportunities facing our industry and have identified meaningful problems that they can help us solve.
The sell-side, for many years, has been at the vanguard of driving and paying for evolution in market structure and technology. It has had existing teams and demonstrable pedigree in collaborating with competitors to deliver mutual goals. For the cynic, this has been to support “just enough” innovation without too much disruption.
The buy-side however, has less pedigree with arguably fewer resources to do so. With some recent notable exceptions (for example, Luminex and Turquoise Plato), this has meant that we have historically relied upon the sell-side to facilitate collaboration to encourage innovation. Looking ahead, there is a real opportunity for buy-side firms to strategically collaborate and partner (including with the sell-side) to the benefit of its clients and industry.
So, secondly, I would encourage buy-side firms to articulate several problem sets, for instance around how best to enhance either high- or low touch trading, so we can actively collaborate to find the potential solutions. One recent suggestion is supporting initiatives such as OpenFin-led FDC3 to enable standardised connectivity for our industry’s desktop applications. It would then be up to the individual firms to follow their own path and add their edge through tailored implementation and use of such tools, including the input of carefully sourced and manipulated data sets.
Collaboration to foster evolution
Being part of a global multi-boutique investment management organisation, I am aware of the power of co-operation and scale that companies acting together can bring, as well as the importance of independence. The two are not mutually exclusive. I also believe members of trade bodies should utilise them as a forum for collaboration and to foster evolution in the market structure. Members are increasingly more proactive in their thoughts and feedback to the market and this is evident in the Investment Association’s position paper on “Last Look” in foreign exchange.
Long may the buy-side seek to collaborate ever more closely and proactively push for market evolution. This will help us all more clearly demonstrate that trading is a core part of the investment management process and that the industry is cooperating to act in the best interests of our clients.
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