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Buy-side innovation across the trade lifecycle

Ian Mawdsley
Ian Mawdsley
Head of Equities, EMEA, Refinitiv

Buy-side firms should focus on creating end-to-end solutions by adopting an open-platform approach.

  1. Rising costs and complexity mean buy-side firms are turning to outsourced solutions capable of delivering solutions across the trade lifecycle.
  2. Technology outsourcing involving fewer strategic partners can risk excluding buy-side innovation from new and smaller vendors.
  3. An open platform with third-party functionality provides a strategic reach for creative developers to deliver buy-side innovation.

Frustrated by the rising cost and complexity of integrating new technologies into legacy front and back office systems, an increasing number of buy-side firms are turning to outsourced solutions.

This began as a move by smaller hedge funds in response to the technology investment needed to remain competitive and comply with regulatory change.

More recently, larger asset managers have joined the trend, moving towards hosted or cloud-delivered solutions on a subscription basis.

In a further attempt to reduce costs and simplify their administrative burdens, we are seeing more buy-side firms undergo a process of vendor rationalization.

Rather than cope with a tangle of contracts, updates and maintenance requirements from dozens of individual suppliers, some prominent firms are looking to concentrate their buying power.

This can result in choosing one or two vendors that are capable of delivering an end-to-end solution to support their trading cycle.

Responding to that demand, some larger technology players are aggressively acquiring companies in an attempt to expand their capabilities and reduce overall costs to the buy side.

Our purchase of REDI, for example, was part of a broader industry consolidation that is likely to persist.

The buy-side trade lifecycle

An end-to-end solution is made up of an integrated set of systems that supports the technology investment cycle. They cover:

  • Pre-trade market analysis

Providing access to quality research and timely data, these systems support fundamental and technical analysis, contributing to effective investment decision-making.

  • Order Management System (OMS)

These systems support pre-trade activities such as portfolio construction, modeling and rebalancing, as well as risk and compliance checks, ideally across all asset classes.

Often, the OMS also contains classic Portfolio Management System (PMS) functions, supporting post-trade activities such as valuations, reconciliations and reporting.

  • Execution Management System (EMS)

Many asset managers are bringing execution in-house, either establishing a central execution function, or training portfolio managers to self execute.

Often the EMS is a standalone application requiring the provision of real-time data from a third-party supplier.

However, the ultimate goal should be to integrate a true multi-asset class EMS into an end-to-end solution, a capability that only a few are capable of.

Additionally, we are also seeing the emergence of a single box solution that combines OMS, EMS and PMS functionality into a single offering.

  • Transaction Cost Analysis (TCA) reporting

Regular reporting on best execution is mandatory under MiFID II, and can be considered a best practice. TCA should provide asset managers with the data they need to enhance performance throughout the entire investment decision process.

Across the trade lifecycle, how can buy-side firms ensure their technology choices make the most of innovation?

Supporting buy-side innovation

As buy-side firms look to concentrate their buying power at fewer strategic partners, there is concern that they will miss out on product innovation from new and smaller vendors.

This underscores the need for an open platform approach to building a complete front-to-back investment system. Such systems enable third-party providers to seamlessly slot in where gaps appear in providing the solution.

Even as one of the few firms that can support the full investment cycle, it is obvious to us that no one firm can be the leader in all components of a system.

The ability to incorporate buy-side innovation from creative developers has been one of the key arguments for outsourced solutions over those built completely in-house.

The same argument should hold against more rigid, closed approaches.

Instead, an open platform, where applications can be linked together with third-party functionality, provides strategic reach for innovative developers, and delivers more robust solutions to buy-side firms.

Our end-to-end investment solution

Delivering a complete end-to-end investment solution for the buy side is a priority for us.

We are committed to the space and will continue to build out our products and services to better facilitate the community.

We are looking to add value by delivering more complete, cost-effective and integrated solutions, so our clients can keep their focus on alpha generation.

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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Thomson Reuters, or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.