03.29.2019

How the Buy-Side Can Boost Trades with Technology

By Jeff Mezger, Director of Product Management, Transaction Network Services

To quote a mantra first championed in 2013 by Gartner’s Peter Sondegaard, every business these days is a technology business – or at least, they should be. While the line between “regular business” and “technology business” has been blurring for decades, not every firm has been taking the appropriate steps to get up to speed.

Buy-side firms, in particular, have not historically focused on technology. Traditionally – up to the last decade or so – hedge funds and other buy-side firms didn’t require robust infrastructure and a fast network, because they didn’t need to be lightning-quick when transacting massive chunks of stock; they just needed to get it done.

Jeff Mezger, TNS

It was also common in the not-too-distant past for buy-side firms to use a single bank to clear all their trades; firms were happy to also use that bank’s technology and network infrastructure instead of finding their own resources.

As priorities have changed over time, however, the buy-side is increasingly moving into a multi-broker scenario and spreading their business among multiple banks.

One reason for this is because of capital introduction; the more banks a hedge fund deals with, the more opportunities there are for each bank to broker introductions between the fund and investors.

The other reason is to gain access to a wider variety of research that can help steer a trading strategy from year to year. Banks employ teams of researchers to look into specific markets and then pass that research to customers like commodities trading advisors (CTAs). The more banks a CTA uses to clear trades, the more research they have access to.

At the same time, buy-side firms’ operations have shifted to rely more heavily on technology and the network infrastructure that supports trades. For example, the number of quantitative hedge funds was expected to surpass $1 trillion of assets under management in 2018. As reliance on quant analysis grows, the buy-side needs to be able to collect huge data sets in real time, and know – down to the microsecond – exactly what’s happening in the market in order to analyze it.

And while banks may have good technology, it’s not their core business. Additionally, this multi-broker scenario can sometimes create more problems than it’s worth.

Firms now are considering either taking ownership of their technology by building their own infrastructure – which is complicated, expensive and often impractical – or employing partner vendors with deep expertise in tech to handle their infrastructure.

The latter option is often the one that makes the most sense for a firm, for six key reasons.

6 Reasons to Use a Network Infrastructure Provider

Finding a single infrastructure vendor that is highly focused on technology – instead of relying on multiple brokers’ technology – can create several advantages for a buy-side firm.

Reduced complications. Spreading resources between multiple banks may gain greater access to capital introduction and research, but it complicates the technology aspect. Firms using three banks can end up with multiple different software systems, varying levels of network connectivity, and three trading screens on a desk instead of one.

To reduce complexity, firms can keep their bank for the trade-related resources they provide, and move to a single provider of network connectivity and infrastructure for the technology.

Security and neutrality. A buy-side’s strategies are its secret sauce, and they’re rightfully protective of them.

These concerns have led some firms to go through multiple brokers to avoid sending all trades through a single bank.

Short of digging the trench to lay their own fiber, a firm has to go through a third party of some kind to send trades, no matter what. While they can’t completely eliminate all visibility into trade activity, it’s possible to minimize the amount of data that can be accessed. Selecting one vendor-neutral network infrastructure provider – someone with no skin in the game, so to speak – for transactions can alleviate security concerns while still ensuring fast, global connections to all the brokers and banks the fund wants to work with.

High-performance networks. Buy-side firms are changing the way they operate and moving toward their version of algorithmic trading: automating the splitting of massive orders into smaller pieces to adhere to the benchmark price they want to achieve. This formerly was done by hand, and now is done using technology – which means the network matters much more than it used to.

Additionally, as quant funds’ market share grows, performance becomes increasingly important for the buy-side.

Quantitative funds are more likely to rely on network and infrastructure performance than other buy-side firms, which means they are more likely to not want to rely on the infrastructure chosen for them by the bank.

Firms, hedge funds and quant funds now require a predictable, low-latency, highly secure network close to an exchange to ensure automated trading software is using the most updated information to move money around without disrupting markets. A network provider focuses on its network as the core component of its business, whereas brokers and banks have other competing priorities that can influence what technology they employ.

Leverage. Network access may have been free at one point, but it’s not anymore. Often, network costs are buried within clearing and transaction fees; a firm is still paying a bank for it, but it’s not obvious, because it’s not a separate line item.

This means using a separate third party for the network infrastructure may give a buy-side firm some leverage with the bank, allowing them to negotiate more favorable rates because they are no longer beholden to the bank’s technology.

A buy-side firm has to pay for its network access either way, whether through a bank or through a technology specialist, which means it can make more sense to get better access by going through a provider.

Customization. Do you look better in a suit off the rack, or one that’s been tailored to your exact measurements? Switching to a single network provider means a buy-side firm can pick and choose data and connectivity options that are the right for them, getting a customized, bespoke solution instead of whatever a bank or broker has decided on.

Competitive advantage. In an environment where every business should be a technology business, customers expect that they will benefit from the latest and greatest innovations, which they assume the business is using.

A hedge fund needs multiple investors to be successful, and being able to tout access via a network that is fast, highly secure and global can be a selling point for a firm’s customers. No longer is a network just the plumbing that makes a trade happen – it can also be used as a differentiator that lures in investors.

Coupling Trades and Technology

Times have changed, and technology has become critical to every business – including buy-side firms and hedge funds.

To stay competitive in the current market, couple smart trade strategies with the latest technology by moving to an infrastructure provider with a network that is fast, global and secure.

Related articles

  1. Essentia analyses data to create behavorial “nudges” for fund managers' investment decisions.

  2. Corporate Bond Trading on the Rise

    With Adam Conn, Head of Trading, Baillie Gifford

  3. The partnership will develop suite of U.S.-listed, physically backed, digital asset ETFs.

  4. Corvil Deploys Real-Time Analytics

    The addition of Essentia behavioral analytics solutions is an extension of Northern Trust Whole Office.

  5. Upstart exchange has seen market share increase to near 4%.