Which tech enhancements are fund firms prioritising?

As the buy-side embraces new technologies, order management, execution management and risk analytics are seen as the vital areas of investment for asset management firms.

As low interest rates have pushed asset owners into riskier asset classes to generate returns, the demand for more sophisticated analytics tools has grown.

Whether it’s transaction costs, risk or performance analysis, the buy-side now see analytics as the essential area for investment in the year ahead.

A recent survey conducted by Longitude Research among 400 individuals, split evenly between portfolio managers and asset owners found that 34% thought investment in analytics was now the most important strategic priority for them.

A further 47% said that it was a ‘high strategic priority’ which was near the top of their ‘to do’ lists.

In an interview with The TRADE ahead of TradeTech, James Lowry, head of Global Exchange (EMEA) at State Street, explained the reasons why buy-siders are craving new technology to give them more transparency.

He said: “You have more firms pushing into increasingly obscure and more opaque asset classes. Having that risk analytics capability is going to be essential.

“We have talked to people who are experimenting with behavioural analytics, those looking to assess a portfolio manager’s biases and identifying areas where they might be hurting performance.”

But it is in trading analytics where interest is really hotting up, according to Lowry.

He said: “In trading analytics a few things come to mind. Corporate bonds is interesting, in particular. Best execution is harder. The real challenge in corporate bonds starts with understanding the pricing of the market. As the market becomes more electronic, it will make that more possible but it is early days.

“The other thing is around an end-to-end collateral tools that allow you different ways of hedging positions. Do you want to do that with a future? A swap? …or some other mechanism? And what are the capital obligations of doing that? 

“You have all the capital rules and the mandatory margining rules kicking in.  This is an area where we have seen some FinTech start up companies working and it is something we give a lot of thought to.”

Lowry says he expects the interest in collateral recognition tools to build over the next year and a half as we move towards the deadline for the new margin requirements kick in.

 

Spending patterns

In the meantime, it’s TCA and Best Execution which is dominating market interest and levels of sophistication vary between asset owners and fund management groups.

As regulators start to demand more from asset owners and asset managers, the demand for transaction cost analysis tools is also likely to grow.

Craig Campestre, head of sales at SunGard’s Fox River Execution Solution, said: “With the fragmentation that is in the market now, people are wanting to know and understand their brokers order routing process in depth.  

“It goes all the way up the chain from the compliance managers to the traders that are on the desk to understand the commission models and how they commission brokers.  The [demand for] transparency goes further than just understanding the numbers behind the trading costs.”

The research conducted by Longitude Research on behalf of State Street found that 78% of investors reported growth of 5% or more in the amount they spent on data analytics over the past three years.

An increasingly intense regulatory backdrop maybe one reason for this sustained spend, but there is a feeling in the market that all firms are keen to ensure they are not missing out on any new advantages which become available.

Lowry explains: “Everyone is recognising the value of data. Traders recognise that there is a lot more data out there as more of the market [asset classes] trades electronically.  

“We are hearing a lot more about the broad theme of transparency and the need to understand liquidity and stress scenarios and risk in a deeper way than they have in the past.”

Of those respondents to the survey, each individual was asked to rank their company as an innovator, mover or a firm that is starting out.

From those people that considered their companies innovators, 34% said they would be increasing the spend on order management and execution management systems, 46% said they would be upgrading their electronic trading system and 44% said they would spend on their data management system.

Other technological areas such as accounting, compliance and performance analytics were not seen as being quite so important.

• This article was taken from the TradeTech Newspaper, published at The TradeTech Conference 2015 by The TRADE.

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