The Buy-Side: The Real Change-Drivers for Fixed Income
By Thomas Dolan, Co-Founder
Fixed income markets, traditionally slower to change than equities ecosystems, are experiencing some interesting shifts. The relationship between the buy- and sell-side continues to evolve, regulatory oversight (particularly from the SEC in the US) continues to tighten, and there is a greater appetite for automation than ever before. These developments were the focal point of discussions during the recent Fixed Income Leaders Summit in Nashville.
Here is a look at a few notable trends that we are observing in fixed income in the broader landscape, among our clients, and as topics of discussion at industry conferences such as the recent Fixed Income Leaders Summit.
Buy-side investing more in technology
Buy-side budgets are increasing and adoption of technology is expanding. This is something that we began to see as a result of the unbundling rules under MiFID II but has really taken off in the last couple of years. Yes, the pandemic was an accelerator of technology adoption among this sector of the market, but fund managers in particular are ramping up their spending on analytics, cloud computing, data management, accessibility to liquidity channels and AI and Machine Learning capabilities.
Specifically, the buy-side has increased its adoption of next-gen order management systems (OMSs). But with the ability of the OMS to connect to multiple execution venues, the complexity of data management increases. Firms need to think about how to address data fragmentation as this can heighten operational risk and lead to data loss and security issues. There are some sophisticated data management solutions on the market (Snowflake and Redshift come to mind) that can effectively optimize data for OMS applications. The result is that the value of the OMS increases as it also serves as an efficient and secure hub to manage fragmented data across multiple trading venues.
Fragmentation in trading venues
The continued lack of credit liquidity has led to a fragmentation in the number of different trading venues, which is good news for the industry. The bad news? Traders are now under greater stress as there is still a lack of interoperability between many solutions and venues. While buy-side firms have expressed a growing desire to have better data from a broader range of sources, this creates lags in the amount of time traders need to execute orders, hindering efficiency not to mention possibly limiting best execution.
This has been an area where 28Stone specifically has seen an uptick in our business with a greater focus on OMS integration, as outlined above. There is a growing need for next-gen client experience applications that can be delivered using made-for-financial-services container technology, an area that firms should keep an eye on both this year and into 2023.
In order to stay ahead of both the automation and innovation curves, buy-side firms need to pinpoint areas of latency and address anything that lacks interoperability. With a wealth of technology options available, it’s easy to employ multiple solutions but can be far more challenging to ensure they are working together to deliver optimal efficiency.
Bigger is not always better
There’s no arguing that the dominant fintech players have held market share in global capital markets for quite some time. There are definite benefits to one-stop shopping with the major, integrated providers. However, we are seeing buy-side firms gravitating more to smaller, niche platforms. Although they have established relationships and steady workflows with many of the larger players, they also aim to support true innovation in the industry and gain more optionality when it comes to trimming costs, elevating efficiency and leap-frogging competition.
It is imperative that firms identify the problems they are encountering and then leverage a solution. Picking a solution that may seem suitable but does not address the workflow and infrastructure needs of your firm will lead to unnecessary costs and an extra set of headaches for your team.
At 28Stone, we have a broad set of unique experience with both the bigger players’ workflows as well as the smaller startups and the innovative protocol ideas they are delivering, especially in the credit sector. So this is also an exciting opportunity in itself: to achieve the best of all worlds and deliver better solutions for buy-side traders by seamlessly bringing together both well-established solutions with the most intriguing new technologies from smaller, specialized providers.
We are looking forward to watching the fixed income arena embrace these opportunities. In the meantime, let us know what trends you are seeing on the buy-side and across the broader capital markets landscape.
For more information about how 28Stone can improve your technology efficiency, workflows and your overall approach to innovation, please contact us at firstname.lastname@example.org.