Buy Side / Sell Side Relationship in Focus
With Lynn Challenger, Global Head of Trading, UBS Asset Management
How would you characterize the state of the buy side / sell side relationship?
I would characterize the relationship between the buy side and the sell side as healthy and constructive. Fortunately for me, UBS Asset Management is a top-tier client to all of the major brokers, so our service levels have remained very high.
What does the broker community do well in terms of meeting the buy side’s needs?
There are at least three elements that brokers are doing well:
- Creative risk management – Given the reduction in the size of balance sheets, I think the brokers have done well to optimize how they use their own balance sheets so that they are able to provide risk to the buy side. This includes the development of central risk books, integrated financing teams, and enhanced communication on axes.
- Consultation – The buy-side trading desk has been growing its ability to automate workflows and perform more meaningful quantitative analysis on orders. The sell side has been doing this for years and have been very willing to offer their expertise and experience.
- Cost reduction – Understanding our need to remove costs from the market. This is primarily being driven by index mandates as we work to take out any structural cost that reduces our ability to track an index. However, it is also benefiting the active managers as the efficiency generated benefits all market participants.
What does the broker community do less well, i.e. what are the buy side’s ongoing pain points?
The broker community, and to some extent the buy side, do not work as efficiently as we could to create more common standards and utilities.
How has the buy side / sell side dynamic evolved over the course of your career?
That is a great question. I think the role of the traditional broker/sales trader has migrated over to the traditional buy-side trader. While the broker is still responsible for the best execution of the child order, the buy side has assumed full responsibility for the execution of the parent order.
What have been the buy side’s unique needs amid the volatile markets of recent months?
I would say since the COVID-19 crisis hit Europe, the needs of the buy side have not changed, but rather been amplified.
Where we have seen brokers step up is in their ability to dissect the market and keep us informed on liquidity, capital constraints, and regulatory/central bank responses.
Relatedly, how have brokers distinguished themselves in 2020?
Our primary brokers have done an amazing job focusing their efforts on keeping clients informed on market changes and general crisis knowledge. We have seen a significant increase in market and liquidity analysis, we have heard from topical speakers and pandemic specialists, and we have read about trading and risk views, regulatory change expectations and new issuances. These insights and information are being delivered in reports, virtual meetings and conferences, and phone calls.
The smaller to mid-tier brokers who do not have the same resources or access to specialists still stepped up and kept crossing opportunities and ability to source liquidity readily at hand.
One other amazing thing is that we have not seen significant system outages from the brokerage community. Their technology has been stable and robust through the high volume and volatile times.
How does UBS Asset Management optimize broker relationships?
The most important thing we do is recognize that brokers are our partners. Of course we cannot be the optimal client for all brokers, but we can be transparent by communicating with them where we think they are strong, why we use and don’t use certain services, and how we think they can improve.
Perhaps even more importantly is that we listen to our partners and respond to their needs. The client needs to understand where it is being difficult or operating at a high cost of service and adjust its behaviours and processes to enable that optimal relationship.
A true partnership is bilateral.
How has regulation impacted the buy side / sell side relationship, perhaps by mandating more transparency?
Speaking as an institutional asset manager, I have seen limited benefit in attempts to improve the transparency between the buy and sell side. We were already in a position of knowledge and experience to command the transparency we required even before some of the recent regulatory requirements.
I would say that, over the past 10 years, regulatory attempts to improve markets have encouraged the buy side to be more active in the development of regulations in partnership with both the regulators and the sell side.
What do you see as the future of the buy-side / sell-side relationship?
I see a future much the same as today. There are products and services that the sell side will always be able to provide at a lower cost than the buy side attempting to do it on its own. An example of this is the ability to warehouse risk in their central risk books. Asset managers are not always able to execute orders at an optimal pace because the duration risk is too great, and to trade faster would incur unreasonable impact costs. A broker can inventory this risk, hedge it and manage it at a macro level. This enables the broker to exit their risk in a more optimal fashion than the asset manager. Some of the reduction in cost is passed back to the asset manager in the form of tighter spreads. In the end, both parties are able to benefit.
It will be through this kind of tight partnership and transparent feedback that our industry will continue to evolve with the markets and best serve our clients.