Published on Tabb Forum, August 2020
In the post-MiFID II landscape, small to mid-size asset managers face rising compliance costs at a time when technology investment is needed to compete in increasingly automated markets. Larger firms have the economies of scale in which to succeed in this environment, but how can other asset managers compete in terms of costs and increased performance? Outsourced dealing desks can offer a solution to asset managers faced with the data dilemma.
In the post-MiFID II landscape, pressure on small to mid-size asset managers comes in the guise of best execution requirements, trade and transaction reporting, and research costs – all of which translate into higher costs and add to already reducing margins. This is set against a background of accelerating automation and technology; for instance, currently 70% of corporate bonds under $100,000 in the US are now traded on electronic trading platforms. Larger firms have the economies of scale in which to succeed in this environment, but how can other asset managers compete in terms of costs and increased performance?
The emerging data challenge
In light of increased electronification of markets and the emergence of new trading venues and execution styles, asset managers need access to data to inform better trading strategies and improve performance. The challenge, however, is the ability to aggregate and analyze data from disparate and siloed sources, and ideally, share anonymized execution data from their peer group. Access to the right data sources using inefficient and ineffective data management tools means it is difficult to consolidate the data to generate business insights and trading or meet regulatory requirements. It also proves impossible to offer new services or insights to clients with any certainty or surety that they are fit for today’s market.
Further, there is a growing appreciation that much of the data required to generate trading ideas and improve future performance is, in fact, not proprietary and available via historical, post-trade or TCA data. Yet these data sets cannot be shared without giving away proprietary information or losing a competitive edge.
This issue is exacerbated by the pace of change around data. Firms are already challenged by managing the data they need today, let alone tomorrow, and risk being outperformed by their competitors or lagging behind industry standard practices.
Adjusting the infrastructure
Outsourced dealing desks can offer a solution to asset managers faced with the data dilemma. By anonymizing and sharing non-proprietary, consolidated data sets of executions conducted across the outsourced technology platform, trading desks can then use this information to improve trading performance – something that would previously have been cost prohibitive or simply just not possible for smaller firms to do on their own.
An outsourced dealing desk offers economies of scale that not only can dramatically reduce brokerage costs but also provide far richer data to enable superior execution by increasing access to better prices to trade against. The analyses of post-trade analytics and insights is used in turn to enhance the platform’s existing decision-making tools and processes through advanced AI techniques, benefitting the end investor and asset manager.
Ultimately, asset managers need to adjust legacy trading infrastructures and invest in innovative tools and technologies to take advantage of new liquidity opportunities, but also ensure that they can evidence compliance with best execution and trade and transaction reporting requirements.
Thrive vs. survive
In this post-MiFID II environment, there is a significant opportunity for asset managers to adapt to changes driven by regulation and cost, and drive performance through automation. Indeed, asset managers are more keen than ever to realize economies of scale, and are consequently continually looking to optimize execution by sharing data. Outsourcing offers a competitive alternative to achieving economies of scale in terms of providing access to a greater set of data for trading decisions.
In this increasingly fast and automated trading environment, it will be the firms that effectively employ technology to empower their dealing desks to outperform the competition that will allow them not only to keep up and survive with the Joneses, but to thrive against them.