Active investors, like most of the financial sector, face renewed pressure from increasing regulatory complexity—as well as competition from passive investment to do more with less. In fact, in TABB Group’s 2017 study U.S. Institutional Equity Trading (IET), regulation and passive investment options were regarded as the most disruptive factors facing the U.S. buy side.
By its own admission, the buy side aspires to be more streamlined and automated in its trading workflow as a means of simultaneously coping with these challenges and growing its asset and revenue bases. How the buy side chooses to deal with these headwinds and how it employs innovative technologies to achieve agility, efficiency, and compliance may be an indicator of its success or failure. Technology, automation, and integration of tools and workflows have emerged as the clearest enablers of success.
Of the 95 U.S. buy-side firms that TABB Group spoke with for its 2017 IET study, over one quarter ranked enhancing technology as a top priority for this year, particularly as a way of dealing with the best execution mandate of regulators and investors and reducing reliance on their brokers for technology. Another one quarter ranked improving workflow as their primary concern.
That being said, the integration of tools and teams to support a more holistic ecosystem of platforms and processes can provide efficiencies, cost reduction, and the ability to apply insights from the abundance of data—economic, client, transactions—that reside throughout the complex investment decision-making process.
Multi-asset class trading strategies are a primary driver of these enterprise system integration needs. According to TABB’s research, those that trade in multiple asset classes mainly comprised the group that is in the process of evaluating implementing an integrated approach. Traditionally, multi-asset class strategies have been executed across multiple dedicated best-of-breed platforms that need to roll up (sometimes manually) for asset allocation and exposure calculation, not to mention regulatory and client reporting. Moreover, when supporting a multi-asset class environment, one would assume that there would be multi-legged/multi-asset trades to execute, which logically need integration of data and execution workflow. Due to those needs, there is an overarching requirement for multi-asset investment managers to be more technologically integrated to support those workflows.
Progress on integration is already happening and is being driven by expansion to new global locations and asset classes, by the need to understand total exposures, and by the demands of regulators for consolidated reporting. According to the TABB study, two-thirds say they have an integrated workflow or are working towards one.
Not surprisingly, TABB's research found that larger firms have made the most progress regarding workflow integration and augmentation. Certainly, these firms’ activity across regions and asset classes is a key driver of both the need and the value of integration. Further, as a capital-intensive undertaking, integration projects benefit significantly from the resources at the disposal of big firms. These projects are also more likely to be expedited by Tier 1 firms’ appetites for streamlining sophisticated and complicated workflows. The benefit of even incremental improvements magnifies under the scale of Tier 1 firms. Finally, almost 20% of head traders report adding capabilities to the trading function to improve communication with PMs and reduce errors.
While the conceptual benefits of having a streamlined, borderless workflow are in the works at the largest firms, both smaller and specialized firms can also benefit from such progress. The report also indicates, however, that for many, progress has stagnated, even given the considerable advantages system integration could offer them.