IT takes top priority for buyside

Asset managers are likely to invest heavily in trading technology to overhaul their dealing desks over the next year. Technology topped the priorities for buyside desks, according to an IT survey compiled last week by Financial News.

The report surveyed 102 investing institutions in the UK, Ireland and the continent with total equity assets of €4.8 trillion ($5.9 trillion). IT, regulation and transaction analysis were pinpointed as the business drivers.

While hedge funds have invested heavily in cutting-edge trading systems, traditional asset managers are turning to technology to support their desks.

Carl James, global head of trading, equities and derivatives at Henderson Global Investors, said: "Technology is the most important issue right now."

Catherine Doherty, head of systems at Investit, said fund managers had a long shopping list for their trading technology systems. "They're trying to work out how they support derivatives, manage data, and measure performance of some complex management styles within the company," she said.

The report found that Barclays Global Investors, which has $1.5 trillion (€1.2 trillion) under management, attributes much of its success to technology. Simon Thomson, managing director and head of equity trading at BGI, said: "Having been on the sellside until four years ago, I think the technology we have is better than anything I've witnessed on the sellside."

BGI's managing director and head of international business Michael O'Brien said: "We are a quant manager, which is why technology is such a powerful element in our business."

Those with less time-sensitive strategies want to overhaul their IT infrastructure to improve returns. Martin Ekers, head of dealing for Northern Trust Global Investors, said the technology had moved from a few years ago when managers saw order management systems as "the Holy Grail for life on the buyside".

He said order management technology satisfied the administrative and compliance side of fund management but for managers to take control of their trading operations they needed to buy advanced technology, such as execution management systems. "The execution management systems mean the traders will be doing their job as efficiently as possible," he said.

The report found that while adoption has been slow, fund managers, particularly those with more than $100bn in assets under management, expected trading volume through algorithms and direct market access to increase by more than a quarter this year. "The use of alternative execution tools continues to grow, albeit at a slower pace than many predicted," the report said.

The report also asked asset managers to rate the brokers providing direct market access and algorithmic tools.

Credit Suisse, which won the Financial News IT Award for Best Algorithmic System in September, topped the polls for direct market access and algorithmic trading tools. Morgan Stanley was a close challenger for direct market access.

Asset managers will invest in transaction cost analysis systems this year, with the report rating it as the second-highest priority for buyside dealing desks.

Two thirds of respondents said they used post-trade transaction cost analysis for 75% of their orders. At the biggest institutions 97% of the orders use the system, the report found.

Pre-trade analysis is less common, with less than half of respondents' orders going through the systems. Tony Nash, head of portfolio trading and electronic trading sales at Lehman Brothers, said: "Inevitably there will be less use of pre-trade transaction cost analysis because it is only useful for more complex orders." He said the post-trade tool was good for analysing data, and the next generation would help users determine strategy.

However, Richard Balarkas, managing director at Credit Suisse, was sceptical about pre-trade transaction cost analysis: "I think brokers are often guilty of creating a lot of hype about the next big thing and at the moment, pre-trade is part of that. Pre-trade tools are not going to give the buyside dealer a silver bullet, which is what some brokers seem to be suggesting."

Preparation for forthcoming regulation is high on the agenda for the buyside, which expects its trading strategy and IT investment to be affected. UK managers are readying themselves for the advent of unbundling, which will be enforced by the Financial Services Authority from the end of July.

The report found that 31% of asset managers surveyed had a formal process for separating the cost of execution from research. A further 38% said they planned to have such a process in place in the next 12 months.

James believes unbundling will have a bigger impact on the buyside than Big Bang in 1986. He said: "A lot of the people I've spoken to on the buyside have got processes in place that allow them to show that they understand the difference between execution and research, but I'm not sure they truly believe that those numbers show the real cost."

One effect of unbundling is that research should no longer play a part in an asset manager's selection of equity broker, yet the report found that this was not yet the case. It found that 83 firms continued to use research as a criterion for broker selection. Quality of execution and back-office efficiency were also important factors.

The European Union and country regulators are urging the financial markets to prepare for the forthcoming markets in financial instruments directive. While the sellside is responding to the regulation that will overhaul trading, the report found that it was yet to become a priority for asset managers.

Managers have been putting off making decisions because the directive is not due to be enforced until November next year, the report said. Stavros Siokos, managing director and head of alternative execution sales for Citigroup in Europe, said Mifid's impact should not be underestimated: "With Mifid, people will try to take more control of how they trade. The legislation makes it a necessity."

The report concluded: "The currents of change are starting to converge: unbundling, the looming presence of Mifid, the rise of alternative execution tools, the growing importance of hedge funds, greater independence for buyside dealing desks and more sophisticated benchmarking of trading performance. These factors point towards a rapid period of evolution for buyside dealers."