All Roads Lead to Technology for the Buy Side

By Sayena Mostowfi and Valerie Bogard, Tabb Group

Originally published on Tabb Forum

The heightened regulatory focus on the buy side serves as a catalyst not only for further data collection and operational transparency, but also for buy-side firms to measure costs and impact, and to prove best execution. Not surprisingly, many of these efforts rely on new data acquisition, technology, and analytics, and many buy-side firms are seeking third-party vendors to alleviate the operational burdens.

In the years since the financial crisis, financial services firms have remained in the regulatory spotlight. In U.S. capital markets, the waves of regulatory scrutiny now have moved from exchanges and broker-dealers to the buy side. And in Europe, the revised Markets in Financial Instruments Directive, or MiFID II, is fundamentally transforming buy-side business operations.

Due to the global nature of the financial markets, client demand and competitive forces, however, this European regulation is expected to impact the U.S. as well. According to a recent TABB study of 100 asset managers and hedge fund firms, approximately 66% of participants believe that even if MiFID II is never implemented in the U.S., it will impact them, up from 38% last year.

Within this global landscape, the buy side faces heightened scrutiny, ranging from fiduciary duties and trading/research cost allocation to investment strategies’ impact on financial stability. The regulatory focus serves as a catalyst not only for further data collection and operational transparency, but also for buy-side firms to measure costs and impact, and to prove best execution.

All roads in this new global ecosystem for the buy side lead to technology. The holistic assessment of trading, research, and workflow opportunity costs are the focus of most leading buy-side firms. Efforts to measure and track consumption permeate every aspect of the buy side trading desk. Forty-five percent of study participants listed technology changes as their top initiative and 20% specified implementing new TCA providers (see chart, below).

Not surprisingly, many of these efforts rely on new data acquisition, technology, and analytics; as the datasets and analysis become more complex and time consuming, many leading buy-side firms are seeking third-party vendors to alleviate some of their operational burdens. The initiative to focus on the addition or integration of external TCA reflects the internal data overload that many firms face. In years past, leading buy-side firms added quantitative headcount, but most firms currently believe that collaborating with a vendor will produce the most optimal results to meet regulatory timelines

For some buy side firms, the breadth of these technology changes will place them in a suspended state of data purgatory; for others, the adoption of new technology and processes will give them greater freedom and flexibility with the information at their fingertips. Either way, the intense focus and measurement on costs has become the new norm and will drive the success of buy-side firms in the years to come.