Ranjit Tinaikar, MD, Advisory & Investment Management, Thomson Reuters
The pendulum has clearly been swinging in favor of the buy-side (made of fund manufacturing and distribution professionals in Asset / Wealth Management firms) away from the sell-side (made of primary and secondary markets professionals in Investment Banks) since the financial crisis of 2008. As profit pools and talent shifts to thebuy-side, will it take the lead in capital markets by adopting technology innovations? Managing retirement funds and investment plans is indeed an onerous responsibility that, if done right, can make a significant difference to individuals, institutions and the overall economy. It is therefore, not surprising, that the buy-side may adopt a conservative view on innovations such as hosting portfolios on data cloud services, using social media to inform investment decisions, or joining open communities.
"A Hedge Fund following retail stocks got market signals ahead of consumer sentiment reports by tracking satellite pictures of traffic density in retail malls"
However, as the pace and level of complexity in managing assets has been speeding up with new regulations, increasing difficulty in beating investor benchmarks, and increasing margin pressures—the imperative for the buy-side to take a more proactive view to adopting technology innovations is becoming ever more pressing. There are at least four themes around which the buy-side can take a more proactive approach to adopting technology innovations.
Search for Alpha:
ETFs are fast eating into the market share of Mutual Funds as actively managed funds find it increasingly difficult to justify their expense structures based on performance against benchmarks. The search for “alpha” is intensifying for all. As a result, fund managers will increasingly need insights beyond raw data to make their investment decisions. These insights may be derived through access to unique content sets or analytics. For example, text mining analytics that scan SEC Filings, News and Research, when combined with the power of traditional financial models can significantly improve ability to predict credit performance of a company. A database that not only provides details on a particular corporation but also its suppliers and distributors could significantly enhance an analyst’s ability to estimate earnings. In one case, a Hedge Fund following retail stocks got market signals ahead of consumer sentiment reports by tracking satellite pictures of traffic density in retail malls! The potential of adopting Big Data and Analytics on the buy-side is immense.
Productivity Through Consumerisation of User Experience:
As margins compress, the productivity of the most critical resource on the buy-side—the investment professional—becomes even
more critical. The investment professional’s desktop is still chained to legacy solutions from the 1980s. A lot could be gained from adopting similar innovations to those brought by Google, Apple and Facebook and others to the consumer world. A portfolio manager in London commented that he was unable to test the full range of his ideas because it was so hard to access the data, perform the analysis and view the output. What if all of this could be done in 30 seconds? What if you didn’t even have to remember the command to execute this—what if you could use natural language? The application of search engines and interactive navigation to data analysis is immense. It could significantly improve productivity of investment professionals.
Mobile solutions are not only a matter of convenience but increasingly critical to improving investment performance. An analyst following the auto sector said, “We will actually go meet the auto dealers in Shanghai to understand growth trends. However, while we are going mobile, we don’t see a single solution that is truly seamless across mobile and desktop devices.” It is indeed time to unshackle the user from the desktop as workflows become increasingly mobile. Most mobile solutions today enable passive viewing of content. The next wave is toward mobile solutions that enable investment activities like order management and provide collaboration tools for validating and building models.
Open Collaboration and Community: While the use of messaging technology between the buy-side and sell-side is well established, it is mainly between the trading communities on both sides, primarily using closed architecture messaging platforms. Buyside firms are, appropriately, compliance-sensitive around use of messaging services. The demand for compliant messaging solutions is ever increasing and communication controls for both one to one messaging and chat rooms are a key part of the industry requirements for messaging tools. Messaging is just one of many tools used for collaboration. A regional bank in Spain has recently developed a social media solution for its wealth advisors that not only enables improved engagement with their customers and prospects, but is also compliance enabled to control, capture and archive all relevant interactions. Most importantly, the buy-side community can play a big role in adopting open messaging standards that give them choice around levels of participation in messaging communities. Capital markets today have access to open collaboration solutions that allow buy-side firms to choose the messaging application and how much of their directory information they would like to expose, while participating seamlessly in global communities. The sell-side will follow the buy-side in their choice of collaboration solution. The buy-side can lead the way.
The sell-side has led many of the technology innovations in capital markets ranging from trading algorithms, industry connectivity solutions and low latency platforms. The time may just be right for buy-side technology to step up.