A New Industry Craving: The Buy-Side’s Increasing Appetite for Automation

Over the last several years, the financial sector has undergone a seismic shift as a result of ongoing regulatory shifts, more sophisticated technology and increasing amounts of data. This has changed not only the overall market landscape but also the relationship between the buy and sell-side. While hedge funds and asset managers still rely on the sell-side for market insight and pricing, buy-side firms have internalized functions like best execution, research and analytics. As a result, the buy-side has increased its appetite - and concurrently its budgets - for automation in several areas of the capital markets workflow. Asset managers and hedge funds once relied heavily on the sell-side for research and automation efficiency. But MiFID II and specifically the unbundling rules under the directive, along with Basel III, and even the implementation of AIFMD almost ten years ago have altered this dynamic and led to the buy-side taking ownership of many of the traditionally sell-side-led tasks. SEC Chairman Gary Gensler has been very outspoken about his drive for creating greater transparency in fixed income, FX and equity markets. The US regulatory body has also articulated its desire to establish tighter parameters around how crypto markets are regulated. Along with increased availability of high quality market data, techniques and processes to harness the data to produce actionable trading opportunities have significantly matured. Over the last year, the buy-side has spent over $10 billion on trading technology, a 5% increase year-over-year and an average of $2 million annually, according to Coalition Greenwich Research. The expanded budgets have created new opportunities for fintech vendors. “Fintech providers are offering buy-side firms cutting-edge tools to improve the research process, risk management and cybersecurity capabilities, to name a few,” says Brad Tingley, research manager at Coalition Greenwich market structure & technology and author of the report. Buy-side firms now have a more comprehensive understanding and larger budgets to spend on more innovative architectural patterns, off-the-shelf products, frameworks and tooling for high volume market data ingestion, stream processing and real-time analytics. In fact, in 2021, 41% of buy-side trading desk budgets were allocated specifically to technology and automation enhancements. Technology that enables trading automation of liquid instruments with easily accessible price discovery enables buy-side traders to focus on higher value trades while simultaneously providing new revenue streams. But it’s not just regulation and a growing technology appetite that has spurred this shift. Industry consolidation and increased M&A activity have also contributed to this burgeoning automation adoption among the buy-side. Organizations trying to implement legacy technology from firms they acquire creates a lack of interoperability, leading to a decrease in productivity and a rise in unnecessary costs. Trading venues, particularly in the fixed income space, have systematically widened their API footprint, opening up these platforms to order lifecycle automation and algorithmic trading. In addition to the broader set of APIs, the trading venues have increased support for no-touch, rule based auto execution of orders further encouraging automation. Although buy-side firms do leverage the sell-side for optimizing trading channels and mitigating risk, the buy-side is spending more on other key areas such as quantitative analysis. While brokers have done well to manage this process despite shrinking balance sheets in recent years, asset managers and hedge funds are turning to their sell-side counterparts far less for best execution and insight on market trends. Even though the pandemic accelerated technology adoption, this trend preceded COVID-19 and the move to today’s predominantly hybrid working environment. Over the last decade, it has been regulatory oversight and increasing levels of transparency that have been the true catalysts for this shift. With automation, buy-side teams can reduce manual processes and more effectively manage volume to instead focus on more strategic, higher value transactions that drive growth and increase their competitive differentiation.