Today, buy-side traders at asset managers and
hedge funds face unprecedented amounts of
change. This change is driven by multiple factors
including shifting competitive dynamics, new
regulations and technology advances. Forced to
adapt their trading workflows in the face of these
sweeping and rapid changes, buy-side firms on
an open platform are well positioned for success.
Competition between buy-side firms is presently
intensified. Assets under management (AUM) have
reached record highs in the past year. Revenues,
however, have started a slow decline. With
investments in lower fee passive index strategies
growing at the expense of more traditional
actively managed portfolios, firms are exploring
new avenues to bolster returns. This includes
expansion into alternatives and emerging markets.
Cost control is also paramount as firms focus on
maximizing bottom line performance – particularly
in areas where they have a perceived competitive
advantage.
These shifting dynamics place increased demands
on trading desks. Record levels of AUM will result
in larger positions, while competitive pressure
dictates that trades are executed in ways that
minimize costs. Expansion into alternatives and
emerging markets introduces pricing and liquidity
challenges. Moreover, as firms look for ways to
drive further efficiency, traders with asset-specific
expertise face the daunting task of assuming
cross-asset trading responsibilities.
New regulatory requirements also compound
the challenges facing buy-side firms. Following
the implementation of the Dodd-Frank Act in
the United States, Europe is set to unleash its
massive revised Markets in Financial Instruments
Directive (MiFID II) in January 2018. The core
price transparency and best execution provisions
of MiFID II require trading desks to take all
sufficient steps to obtain the best possible
results for their clients when executing orders.
To meet this obligation, buy-side trading desks
must enhance workflows across the full life
cycle of a transaction: pre-trade price discovery,
counterparty selection, execution mechanism,
Winter 2017
post-trade analysis and reporting. Given the
difficulty in determining market benchmarks for
over-the-counter (OTC) trades, sourcing quality
data is essential.
While new competitive dynamics and regulatory
requirements materialize for the buy-side, trading
technology continues to advance. Improved
vendor solutions for analysis, order management
and execution make outsourcing to hosted or
cloud delivered technologies attractive, removing
the headache and cost of maintaining legacy
systems. Time-to-market for new technologies
has drastically reduced, and Fintech innovations
are pouring in with a range of capabilities such as
regulatory compliance, transaction cost analysis
and asset valuation. Trade automation is a priority
for many firms and use of execution algorithms
is on the rise. With the onslaught of new
technologies, trading desks must make decisions
about what solutions to adopt. However, with such
varied needs, there is no longer a one-size fits all
approach.
New to financial markets, open platforms
offer buy-side firms powerful capabilities for
navigating the changing trading landscape.
With tools to source and distribute liquidity
across borders and markets, traders on an open
platform can easily accommodate changes to
portfolio compositions and cross-asset trading
requirements. Open platforms easily integrate
premium data across the trade workflow. This
enables traders to make pre-trade decisions on
the same prices used for execution and post-
trade analysis, greatly simplifying adherence to
new best execution regulations. With streamlined
onboarding for new technology vendors, traders
on an open platform also benefit from choice and
lower total cost of ownership, as they can select
preferred providers for pre-trade, execution and
post-trade services.
In the face of unprecedented changes, buy-
side firms leveraging an open platform can
confidently adapt and enhance their trading
workflow to gain a competitive edge.
www.buysideintel.com
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