The Changing Technology Landscape
Nick Greenland, Head of Broker/ Dealer Relationships BNY Mellon Investment Management EMEA and APAC examines ongoing technology evolution on the buy-side.
The shift from the sell-side to the buy-side is not a new trend – the move of people and technology from one to the other has been talked about a lot, and it was also my route to the buy-side. But to my mind that is just part of the story. If we look at what is happening on the sell-side, they have been under pressure from a global and local regulatory environment. Businesses that were profitable are no longer core or as profitable.
“Necessity is the mother of invention”, and human beings are resourceful – human capital which has been developed in one part of the market is now more desired in other parts of the market. We have seen a wave of innovation across the market in terms of market structure and financial technology, for example the 50+ different platforms that are apparently currently under development in the fixed income market. Human capital has had to reinvent itself – the buy-side is also now under more scrutiny and facing new challenges, and skills valued in one place are now more in demand elsewhere. It is more complex than the sell-side just migrating across, and it definitely isn’t uniform or moving at a constant pace.
The differences between the buy- and sell-side are in some cases blurring and will continue to do so. The effect on the broker dealers, for example in fixed income markets, means that on balance the sell-side is much less able to hold inventory, and there is scope for the buy-side to reassess how it looks at and manages involvement in the asset class. This is not to detract from the sell-side; they still perform many valuable services for the buy-side and we need to understand the changes in roles to be able to get the most out of those relationships for our underlying investors. The pattern of shifting human capital is on balance beneficial for both sides once it has been understood.
We are in a state of unparalleled innovation in the financial markets. As the market conditions have changed, the playing field has changed, and whilst buy-side and investment managers may want to continue as normal, we need to look at different ways of accessing liquidity and obtaining information needed as part of our investment management and trading processes. As part of a level playing field, a solid partnership with the sell-side is the ideal state.
Some of the experiences I have had in my career on the sell-side illustrate this shift. My colleagues and I on the buy- side who share these experiences, perhaps more instinctively, understand the language and rules of the sell-side which differentiates us from the buy-side as we can naturally empathise with the sell-side. Now, on the buy-side, we are able to read the other side of the conversation and understand the at times unspoken sell-side part of the conversation as well. It adds that dimension of clarity. Our partnership (Buy to Sell-side) is much more than transactional day-to-day, it is much more complex and nuanced.
I am very excited that there is a sea change of support amongst the buy-side to understand that whilst we may compete with one another when raising and investing money, we don’t compete when it comes to trading. We all face similar hurdles and have the same fiduciary duties and regulatory obligations and some of us are beginning to share the realisation that together we are stronger. A co-operative of informed buy-side participants has much more power than individual firms. I am excited to be able to pick up the phone and talk to people in the markets around London, Europe and the US on matters of co-operation – how can we make this work for the best advantage of our underlying client and therefore meet our fiduciary duties.
The very definition of what platform/function is a competitive advantage changes over time and with evolving technologies. As everyone is trying to strip out cost, things that were previously core are no longer core to all in the market. So all firms are starting to ask themselves to redefine their key areas of business, where they can add alpha and what differentiates them. If we can automate and reduce manual intervention and reduce errors, especially for the smaller value tickets, we can make trading as a whole more accurate and timely.
Historically the buy-side have not been as successful in partnering up with peers in industry initiatives and definitely not been as able or willing to invest and hold equity as the sell-side. Therefore, if we can partner with one another in a neutral industry manner to ease the issue at hand, be it information flow, liquidity etc., then that has to be the betterment of our underlying investors who we have a fiduciary duty towards.
There are a range of new and established industry consortia where the buy-side are playing an active part. The best ones in my mind are where the buy-side are “joined up” and are presenting a united front on a level playing field with the sell-side. Saying that, many of these consortia all have different points of origin and one size does not fit all, and many people are involved in multiple initiatives, again to the benefit of the wider industry.
There are probably too many initiatives currently being developed, and too many platforms for all to reach the necessary critical mass. This will mean that in due course there will be some consolidation.
The rise of “electronification” of trading is inevitable and it is a boon for us. Where it is both appropriate and possible for a trader to use those platforms, it enables them to spend more time working with the portfolio managers to give them more market colour and feedback and to spend more time talking about how to execute in more liquidity constrained markets. Making sure that traders have the time and freedom to be part of these industry groups and bodies is important because their input as seasoned and skilled practitioners is needed in the ongoing discussions around the evolution of our market structure.
Most of us have early experiences in life which colour your views, and on build versus buy. I formerly worked for IBM, so my natural inherent question is “why build when you can buy?” If a firm or person can build something more efficiently which meets all your requirements and you can tap into those skills and resources, why should you not take advantage of that? However, it is not a panacea. There are some specific parts of the markets where third-party companies don’t have the expertise required so the buy- or sell-side are better placed to build those technologies themselves. But I think with innovation as people move between the sell-side and buy-side and these consortia and tech companies launch, and companies move into more asset classes and markets, all of the definitions can become a little blurred.
The buy-side is being more demanding of our partners than ever before while the sell-side is enduring a wall of regulatory change and clients are asking more questions. It is natural that the majority of buy-side firms are looking to get the best possible outcome from their people and changing role in the market. And technology is part of that – the market has always been changing and evolving. Experience matters with very few of today’s electronic traders having been around at the time of Black Wednesday (or indeed other periods of “6 sigma events”) – there is a strong element to which human traders and their ability to draw upon experience and relationships are able to take control of the situation and get their clients’ orders executed and manage their clients’ and their own firm’s risk. In an automated electronic environment things move lot more quickly – there is always a balance between people and technology.
There is always a technological drive and change, and there is always risk. The skills of traders are changing as a result. As long as I can remember, people have been looking at technology from two different kinds of the same coin – is it game changing and does it threaten my job. This analysis is overly simplistic. Human beings are very adaptable and it is unfair to say that dyed in the wool traders aren’t capable of being at the forefront of change, but they probably won’t be the ones coding. However they can still be driving the conversation and the industry and feeding in their requirements. Experience is highly valuable – seeing different markets, understanding different participants. Technology can enrich information flow and the decision making process, but it doesn’t replace it.