The results of January’s theTRADEnews.com poll show the buy-side has much to consider in 2012, although the importance placed on technology upgrades has surprised many, given tighter budgetary constraints.
Improving trading technology was identified as the main goal for buy-side firms this year, grabbing just over a third of all votes. But adjusting to regulatory change (26.5%) and reviewing broker lists (24.1%) were not far behind.
Discussing investment strategies with portfolio managers lagged slightly, with just 15.6% considering this to be top of the buy-side trader’s action list for 2012.
The diversity of responses reflects the different ways buy-side firms have chosen to tackle ongoing market turmoil, but priorities may also vary depending on the range of asset classes traded, with fixed income and OTC derivatives markets poised for substantial changes in the coming years.
Final agreements are edging ever closer in the European market infrastructure regulation and the US’s Dodd-Frank Act, which will lead to widespread changes in the way OTC derivatives – previously managed informally between the buy-side and their brokers – are traded. Meanwhile, MiFID II, which extends the original directive beyond equities, will increase visibility in the bond markets and more closely monitor electronic trading.
Commenting on the poll results, Adrian Fitzpatrick, head of investment dealing at Kames Capital, noted changes to fixed income markets under MiFID II will be on buy-side radars, but may not be a major cost issue.
“We are already connected to fixed income trading platforms such as Tradeweb and MarketAxess, partly because the ability to trade electronically reduces risk,” said Fitzpatrick. “However, connections to venues are relatively cheap for the buy-side and much of the cost falls on the brokers that provide streaming quotes to these platforms.”
While he admits he would have expected regulatory change to be a more decisive issue for the buy-side this year, Frederic Ponzo, managing director at consultancy GreySpark, notes that improvements to technology need not incur massive costs, given the rapid pace of innovation over recent years.
“There are now a range of technology options for firms of all different shapes and sizes that were not necessarily available a few years ago,” says Ponzo. “This makes investing in the necessary technology to meet new regulatory requirements less of a financial burden than it may have been previously.”
He adds that hedge funds, which may not be as encumbered by new regulation as traditional buy- and sell-side firms and have found ways to generate alpha despite the adverse market conditions, would also have more scope to invest in technology.
Peter Baillie, senior equity dealer at Martin Currie Investment Management, said his desk does not trade much fixed income or derivatives and expects his existing order and execution management technology to handle changes to market structure in these areas.
As such, he notes that reviewing broker lists and understanding regulatory change are at the top of his firm’s agenda for 2012.
“In the current market environment, turnover has fallen and commission pots are reduced as a result of declining average rates driven largely by increases in use of algorithms,” said Baillie. “This places the buy-side under inherent pressure to use commission pots as efficiently as possible, such as by reducing the overlap in the research provided by each of the many providers used, whether they are a fully bundled global broker or an independent research house paid through commission sharing arrangements.”
He added that involvement with industry groups such as UK buy-side body the Investment Management Association and FIX Protocol Limited has helped buy-side traders understand and plan for the variety of new rules that will be introduced over the next few years.