The Changing Impact Of Best Execution Requirements

Recognising Limitations
Another reaction is perhaps more fundamental. It is easy to think that the amalgamation of systems is inherently desirable because it is predicated on an assumption that technology consolidation will lead to perfect trade processes. However, there is a growing acceptance that the ideal cannot necessarily be attained and that idiosyncrasies among asset classes and the diversity of pre- and post-trade procedures in different markets mean that complete integration is neither desirable nor feasible.

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For instance, in Asia buy side execution is not flawless. Success typically relies on local market knowledge and the skilful use of tactics by individual traders, especially in the bond markets. Although the changing dynamics must be accommodated, it makes sense to keep things simple and perform those tasks well. In the past, the emphasis was on installing the biggest and fastest systems, but now the focus is on filtering, ensuring that systems are adopted that are most suitable and relevant for both sell-side and their clients. Some firms are using multi-asset platforms, while others prefer to retain single-asset platforms which might be less efficient but are less vulnerable to error.

Nevertheless, regulation is driving a shift towards consolidation and cannot be ignored despite practical experience that suggests that separation might be best. In Asia, there is state of flux as stakeholders try to determine the best systems to meet regulatory requirements yet ensure operational effectiveness. These will also have to accommodate new disruptive technologies, such as machine learning and AI, as well as compliance with evolving mandates for “green” or other corporate governance investments. In any case, trading desks are now central to the investment process. Once considered a cost centre, they are now a potential source of value.

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