As buy-side firms morph to take on functions traditionally associated with their sell-side counterparts, the skills on asset managers’ dealing desks have increased, providing greater autonomy when making execution decisions.
Do asset managers now more resemble sell-side firms?
Technology, a push towards more transparent investment processes and greater demand from end-investors to understand how their money is allocated has resulted in a shift of roles power from the sell-side to the buy-side.
Asset managers today, more than ever, are willing and equipped to ask tough questions of their brokers or demand granular data from which to make decisions their brokers may not at first support. Conversations around conflicts of interest on the sell-side, which have centred on routing practices based on exchange rebates that go to sell-side firms, have become thrust into the open as asset managers demand a higher level of service from the sell-side.
In the UK, this conversation has resulted in a regulatory change to separate research and execution payments to the sell-side, while in the US ‘soft dollars’ will continue, but are joined by growing use of commission sharing agreements, where a buy-side firm can pay for research from a sell-side provider with a portion of the commission from the executing broker. This lets the buy-side take control of the investment and trading process, and channel execution through a bulge bracket firm that may have the best tools, while receiving preferred, or bespoke, research.
Has greater access to data better empowered the buy-side?
Data has become the currency of the power shift from the sell-side to the buy-side. Now, asset managers can demand increasingly rich data sets from their brokers to determine how, where and why a broker makes its money and where this may impinge upon an optimal outcome for a buy-side dealing desk, and ultimately, and end-investor.
The push to extract a greater amount of more granular data from the sell-side continues, and now the buy-side is looking to see in which venues its order was routed and in what capacity, regardless of whether the order executed there or not. This means an asset manager will be able to deduce sell-side practices to a level that heretofore has not been achieved. For brokers, giving up the data may not lead to reduced commission dollars, but could well affect the bottom line through lower venue rebates should asset managers choose not to route to maker-taker pools. But, the bulge bracket now competes on transparency, as much their execution services, and a willingness to provide extensive data to meet this buy-side data demand in a standardised way will further solidify a broker-buy-side relationship.
In what way has technology like algorithms changed buy-side dealing desks?
Algorithmic trading is the beating heart of electronic trading, and the buy-side’s willingness to trade directly via algos as opposed to channeling orders through sales trading on the phone, further exemplifies the knowledge and skill shift from brokers to asset managers. As shown in The TRADE’s Annual Algorithmic Trading Survey – now in its seventh year – the buy-side show no sign of letting go of these tools that give them greater power on the dealing desk to execute orders.
Such is the appeal of algos and smart order routers, which use algorithmic logic to route orders based on a buy-side firm’s needs, that several asset managers look no longer to their brokers to develop or source these tools, but can generate them in-house or with third-party providers – such as the case with Finnish buy-side shop Pahjola Asset Management – a buy-side firm developing products for the buy-side. Brokers take note.
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