Investment banks will need to form tighter partnerships with buy-side clients to drive competitiveness in the evolving investment landscape, according to a repot from research consultancy Tabb Group.
As regulatory change increasingly forces transparency onto the investment banking industry, Tabb’s Rebecca Healey believes the industry is entering a new era of collaborative partnerships between the buy and sell-side.
“By sharing proprietary information and trading strategies, the buy-side have the opportunity to harness the full capabilities of a global investment bank, provided the sell-side matches the level of transparency and partnership,” she said.
Areas where strengthened collaboration could benefit both sides include automating key processes, such as data trends within clients’ portfolios.
This would enable a bank to pro-actively alert their clients to trading opportunities with another client or a revised reweighting based on market updates and research.
The research tallies with recent changes in strategy among buy-side trading desks. J.P. Morgan Asset Management deputy head of equity trading for the Americas, David Schiff, told theTRADEnews.com his firm’s algorithmic trading strategy has evolved to move in-house, though still relies on sell-side technology and expertise.
“We’re really keen on developing our own suite of [algo] products which allow us to customise to meet the objectives of a particular fund manager or trading strategy.
“We still use the DMA pipes provided by our counterparties, so we’re not circumventing the sell-side, but we want to ensure that we take ownership of our algo trading and we think that’s a competitive advantage for us,” Schiff said.
Cost pressures on the sell-side will also force the relationship between asset managers and investment banks to change, according to Healey. With volumes remaining depressed since the financial crisis, reduced head count and brokerage services in investment banks means the buy-side is increasingly forced to automate flow as high and low-touch services begin to merge.
The range of products a trader is using has also increased rapidly, where the liquidity of a particular name may result in trading convertible bonds one day, credit default swaps the next and so on. Being able to flip between products as required means the buy-side will need to increase their knowledge to operate in a multi-asset world, and investment banks will need to help facilitate this with pointed access to research.
Key to the development of both buy- and sell-side firms will be doing more with less, according to the report. Automated trading through algorithms, which is already dominant in equity markets, will continue to extend into other asset classes as margins in these areas continue to be squeezed.
However, while technology is a major driver of this change, human factors will be important to ensure that firms are able to best utilise the tools available to make their business sustainable, according to Healey.
“Although technology will be a differentiator, culture shifts, human capital management and process re-engineering will be critical in creating winning and sustainable business models for the future,” she added.