After solid market performance in 2013, institutional investors will seek to capture alpha as the market continues to trend upward, and will look to innovative technology and greater use of data to improve execution quality.
How will the buy-side effectively ride positive equity market performance?
Despite incoming US Federal Reserve chair Janet Yellen assuring the industry there would be no dramatic changes to the government’s US$80 billion monthly bond buying programme, a scale back – no matter how slow – is widely expected to occur.
The market will avoid the lurch witnessed in June after outgoing chair Ben Bernanke told the public an eventual repeal of the programme was inevitable. Indeed, one of the central themes of 2013 has been the strong performance of the US equity market, which has benefitted from a generally accepted view that equities are more attractive than they have been since 2008.
Further development of algorithmic strategies will also occur, with potentially greater buy-side take up of the more innovative solutions. One sell-side head of trading said recently that since 2008 buy-side traders have traded cautiously against traditional benchmarks like VWAP as opposed to more risky execution strategies, in order to keep their jobs as desk sizes shrink.
Asset managers will also have to grapple with significant changes to market structure, including the creation of a completely new market structure in the form of swap execution facilities and the central clearing for the OTC derivatives trades they execute. This long-running project, which has affected the wider industry adjusting to post-crisis regulation, will likely consume significant resources in the first half of the year, as the buy-side will have to execute the very liquid credit and rates swaps on swap execution facilities from February.
How central to execution will data analysis be in 2014?
After years of grumbling and broker discussions, the buy-side will plough further ahead in accumulating and digesting actionable data to inform trading strategies. The on-going discussions on broker routing, dark execution and the value of the maker-taker pricing model are expected to continue to tilt the buy- to sell-side power balance towards asset managers and the end-investors they represent.
Larger asset managers in particular have shown they can handle complex scrutiny of transaction cost analysis data and demand brokers supply this information in easy-to-use formats or offer services analysing the data on behalf of institutional investors. This will shape how, and with who, the buy-side executes in the equities market.
Will outsourcing expand as expected for asset managers?
The buy-side will continue to explore outsourcing traditionally key areas of functionality, which could include elements of the trading desk itself for certain shops. Outsourcing generally has experienced a boom since 2008, as firms across the financial services industry have had to reduce costs while meeting the same targets and this applies to asset managers among others.
Confidence in fully or partially outsourcing the trading function to a third-party may depend on experience, size of buy-side firm and remit of asset classes covered. But, as solutions come on line and develop, asset managers will at least have to weigh the pros and cons of such an offering.