Traders’ Technological Needs Converge

Terry Flanagan

A myriad of technology and sell-side trading solutions continue to emerge into the complex electronic marketplace. For buy-side traders, the issue of buy versus build continues to be a dominant one. The market has long seen that not all buy-side firms are created equal, and, thus, neither are their desktop solutions. Yet, there is a great deal of converging needs in today’s markets, according to some.

“The delta that existed between hedge funds and traditional buy-side traders has started to shrink,” said Graham Jones, executive director of prime services at investment bank CIBC World Markets. “The traditional buy side is now using the same technology as the hedge funds. They are investing in EMS [execution management system] technologies and are using more algos. The playing field is very level today.”

A level playing field is also essential when considering that the trading community has been infiltrated by high-frequency traders, who often require even more sophisticated technology than hedge funds.

“An increased competition for order flow, along with the squeezing of the fee structure and demand for latency reduction, have been the drivers for the rise of automated trading and high-frequency trading,” said Mo Takhim, head of managed services at ULLINK, which provides low-latency connectivity, smart routing and order management to traders.

Even within the sophisticated world of hedge funds and other non-traditional traders, no two firms have the same desktop needs. Quantitative multi-strategy hedge fund Aien Capital had to build its own technology arm from the ground up because it couldn’t find anything on the market that would fit its needs, according to chief executive Ugur Arslan.

“Quantitative, low latency-sensitive focused hedge funds often build because of the complex nature of their flow,” said Bob Cancelli, executive director at CIBC World Markets.

Other alternative managers have opted for existing solutions on the marketplace, but have made sure that vendors provide a consolidated system to avoid having to pay for multiple solutions; a key point in times when trading costs are scrutinized more than ever before.

Radiant Investment Management, a Canadian-based event-driven hedge fund, recently cited its decision to utilize Linedata Beauchamp, a portfolio management system, as something that “could handle the complex instruments we trade, shadow our NAV [net asset value], and won’t require us to invest in the overheads of an IT department to run it”, said Norm Kumar, chief investment officer and chief compliance officer at Radiant.

Radiant is not alone in its desire to avoid overhead infrastructure costs. Jones at CIBC World Markets told Markets Media that it is a “plug and play environment” across the board, and that firms are buying into easier technology such as cloud-based services and co-location, which can often be provided by brokers.

One service that shouldn’t be provided by brokers is transaction cost analysis (TCA), which has also become a popular cost measurement, though perhaps less so among hedge funds. Much TCA is being conducted in-house and not by brokers, according to Jones.

“While traditional asset managers are thought of as the primary users of TCA, we are seeing an increasing trend among the hedge funds to rely on those TCA tools as they, too, feel the pressures to reduce costs,” said Chuck Garcia, global head of asset management marketing at TradingScreen, a buy-side solutions provider. TradingScreen’s client base ranges from wealth providers to traditional asset managers and hedge funds.

“We designed our system so hedge funds and other types of asset managers can work from the same tool kit, and customize those tools according to their specific needs,” said Garcia. “The system is very scalable with multiple tools, including access to hundreds of algos, TCA, analytics, straight-through processing and the world’s largest broker distribution network.”

While buy versus build has been a long-standing debate within the markets, some market participants are seeing the gap close between the two options, as solutions providers acknowledge that even antiquated traders are upgrading their strategies.

“Today, buy-side traders [traditional asset managers and pensions] are shifting towards a hedge fund style of trading,” a source told Markets Media. “There will be less buy going forward because vendors know they need to offer more tools, and solutions out there, or they’ll be left behind.”

However, one trading need that still remains dominant for traditional asset managers is their need for execution quality.

“The institutional buy side is very focused on measurement metrics to evaluate their quality of fill,” said Cancelli at CIBC World Markets, noting that the “Canadian buy side is still very much block centric, [but] more and more of them contemplate execution quality and trade analytics, much like the U.S. has done the past 10 years.”

Despite differences in trading style, the markets are undoubtedly becoming more electronic and in need of “low touch” capabilities and custom solutions.

“People want high touch consulting in a low touch environment,” said an unnamed broker-dealer. “We look at analytics, performance, trading styles and benchmarks clients are trying to achieve. From there we go back with recommendations and ideas. There’s a continuous feedback of optimization that occurs on customized strategies. You trade, you customize and you look back at the data and adjust until you get a strategy that really achieves your needs.”

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