Brokers under pressure to provide more multi-asset tools

Buy-side appetites for more sophisticated cross-asset trading capabilities are outpacing sell-side counterparties' ability to develop and provide such tools to their most valuable clients.

Those brokers most effectively able to provide multi-asset trading tools to their investment management clients going forward stand to gain a competitive advantage, according to a recently published report by financial consultancy, the Tabb Group.

In the report, Cross-asset trading systems: Controlling the trader's desktop, author Andy Nybo writes that buy-side firms are increasingly utilising more complex instruments to achieve investment goals, while at the same time seeking ways to maximise trading efficiencies via more integrated, streamlined desktop applications.

Although automation of individual markets has made trading more efficient and voluminous within those particular markets, automation across markets presents a major challenge to managers and brokers active in multiple asset classes and, as a result, buy-side firms are finding their current third-party and broker-provided systems taxed as a result.

As previous industry reports and studies have shown, cross-asset trading strategies entail significant operational and technical challenges for managers and their software providers. Many such transactions require multiple trading platforms and manual processes more often than not disconnected from one another.

Such operating environments have inevitably produced risk management concerns. A lack of connectivity/interoperability between systems also prevents real-time oversight, writes Nybo, and hinders functionality typically provided through single-asset strategies and systems.

Like investment managers, brokers also have their own legacy infrastructures with which to deal. Now, as their buy-side clients adopt multi-asset strategies, brokers are beginning to step back from their traditionally silo-based approach to develop more consolidated infrastructures to meet client demands.

The Tabb Group expects brokers will need to make further efforts to update their own infrastructures in order to address evolving client requirements for faster execution, real-time reporting and better order integration.

Eventually, however, Nybo argues that sell-side technology pro- viders will have to do more than re-engineer their client- facing infrastructures; combining sales and trading desks for different asset classes will provide better customer service, the analyst suggests.

The Tabb report indicates better desktop integration as the top demand from buy-side traders pursuing multi-asset investment strategies. For now however, such a demand is unlikely to met by third-party technology providers to the nature of such trading; market access as well as data standardisation become both more crucial and more difficult to provide in a multi-asset environment.

Front- and back-end connectivity also presents challenges for cross-asset traders, according to Nybo.

As such, current OMS, EMS and DMA systems used by many buy- and sell-side firms are found to be lacking in support of cross-asset capabilities, having been developed largely for particular asset types over the years. Buy-side firms interviewed by the Tabb Group cite customisation, interface and global trading capabilities as most pressing weaknesses of EMS and DMA systems they currently utilise.

Observing the ongoing trend in which buy-side trading desks adopt tools typically suited more to brokers, Nybo writes that buy- and sell-side trading technology requirements appear highly similar in cross-asset environments.

Third-party developers traditionally providing sell-side clients with low-latency connectivity, algorithmic trading tools, and other advanced capabilities have gained traction among larger investment and hedge fund managers with more complex strategies, and in some instances, brokers are now offering capabilities provided to them by vendors to their buy-side clients.

Going forward, Nybo notes that sell-side firms offering their own EMS tools to buy-side clients should expect to increase development efforts and investments in their products to meet buy-side multi-asset trading needs that will only grow more complex. In some instances, such efforts will drive more competition between these brokers and third-party trading technology vendors offering similar capabilities to the same target market. >