For buy-side traders, achieving best execution isn’t possible without managing and utilizing voluminous amounts of data and information.

Years ago, institutional investors would typically phone their brokers with queries about market ‘color’, venue suitability, or trade-performance metrics. Now, that information is more likely to be found in-house, generated internally or with the assistance of a third-party technology vendor.

“We are increasingly looking internally and measuring our own processes,” said Bill Baxter, head of global program trading at Fidelity Investments. “We measure everything — our portfolio managers’ trading and order-placing behavior, and our funds’ trading-desk processes, which includes our impact in the marketplace as well as any algorithms we use and venues that we access.”

The information empowerment is driven by several factors that have recent relevance: the buy side’s more pressing need to preserve every last basis point of excess return in a difficult market; a ‘democratization’ of technology that has enabled more firms to deploy leading-edge systems; and a constrained sell side that simply doesn’t have the capacity that it used to.

Also, as the ongoing evolution in market structure pushes more trades onto screens, buy-side traders have further incentive to DIY and not need to consult with Wall Street.

“We are trying to create a feedback loop to make improvements,” Baxter told Markets Media. “When we build scale and efficiency and apply technology and math to our trading process, it’s all about getting the best price for our fund shareholders. This has resulted in more electronic, or self-directed, trading over the past three to five years.”

To be sure, ‘big data’ cannot be effectively harnessed without the right people behind the process;  to that end, some investment institutions are recruiting outside of the buy side’s traditional realm.  Earlier this year, Invesco’s trading head Kevin Cronin said the firm had recently hired a high-frequency trading developer with a Ph.D. in applied mathematics, another Ph.D. hire was in the works, and the firm’s newly hired global head of electronic trading came from the sell side and was a Ph.D. candidate himself.

In the new paradigm, a buy-side trader may know as much or more about current market conditions than the sales trader on the other end of the phone, who is ‘working’ the order.

“They now have visibility that sales traders on the sale side simply don’t have,” said Tom Doris, chief executive of OTAS Technologies. “The guy on the buy side knows what the typical top-of-the book liquidity is, what the spread ought to be, what the volume curve ought to look like. The sell side typically doesn’t these days. The sell side is, for the first time, at an information disadvantage when it comes to live intra-day market analytics.”

Buy-side conversations with the sell side are “at a very expert level,” Doris said. “They’re not picking up the phone and saying, ‘Tell me about what’s happening in the options market for IBM.’ They’re saying, ‘I’ve observed what’s happening in the options market. I think it’s got this, this and this implication. Let’s talk about the scenarios that can play out, and how we might structure a set of instruments in order to express my view in terms of risk and alpha.”

Featured image via James Thew/Dollar Photo Club