Buy Side Challenged on Data
The rapid growth of data presents management, storage and utilization challenges for institutional market participants, some of whom are more up-to-speed than others.
“The buy side has huge amounts of data but they’re not always making use of that data,” said Peter Chirlian, chief executive of Morris, New Jersey-based technology provider Armanta. “What good is ‘big data’ without big analytics?”
Regulators have pushed trading and investing firms to improve their data and risk management since the global financial crisis of 2008-2009, most notably via the sweeping Dodd-Frank Act that was signed into law in 2010.
“Demand for risk-management technology is being driven by regulatory pressure, but also internally,” Chirlian told Markets Media. “Financial companies want to get serious about risk management and thoroughly embed it in their businesses. It can’t be just a back- or middle-office function anymore.”
An investment firm may store data at a state-of-the-art data center, but there has to be the additional leg to make the data usable. “It’s not enough to have just a data ‘solution’, like a warehouse,” Chirlian said. “The financial organization needs to make use of that data and needs to assess risk.”
For an institution, upgrading data and risk management functions is a massive endeavor that can take months or years. Amid the recent lean market years and attendant do-more-with-less ethos, such projects can take more time than expected or even be back-burnered. As a result, market participants have fallen behind.
“Most everyone is not happy with where they are with risk technology,” said Chirlian, who previously held senior fixed-income positions at Prudential Global Asset Management and Goldman Sachs. “They need to move their risk operations from what was envisioned 10 to 15 years ago, to what is needed today.”
“The buy side is looking for a broader use of quantitative measures for portfolio analysis and portfolio construction, and for people to have this capability across the enterprise,” Chirlian continued. “Today, too much of the technology still relies on overnight batches and pre-aggregation.”
Deficiencies in data and risk management are typically firm-specific and vary widely, but there is at least one broad commonality. “On the whole the buy side doesn’t have the quantitative capability the sell side does, from a risk standpoint,” Chirlian said. “The buy side needs to get better at incorporating quantitative techniques in their risk processes.”
Up until five or six years ago, only large buy-side institutions were interested in comparatively sophisticated data and risk management products. Now, mid-sized institutions are increasingly in the demand mix, a down-market trend that will continue as “analytics needs will only get bigger,” Chirlian said.