How Will The Buy-Side Reset For New Market Challenges?

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“The buy-side” is a diverse group, hailing from numerous firms employing a range of investment strategies. Recently, Coalition Greenwich spoke with 111 global investment firms to better understand sentiment around developments in data, technology and electronic trading. Although traders we spoke to differed in background (roughly 67% identified as using both quantitative and qualitative methodologies), most agreed the current trading environment just doesn’t lend itself to older, traditional electronic trading methods and protocols that have held up well in the past. For instance, while request for quote (RFQ) still accounts for over 40% of market volume, that percentage has dropped notably since the pandemic began over two years ago.

So What Does The Buy-Side Really Want?

Pontificating over what the buy-side wants and really needs has been a perennial question mark for the sell-side. Our research points to three areas that stand out:

Actionable pre-trade data: Unreliable pre-trade data has been a burden for buy-side investors. With the onslaught of new fixed income data flowing into the market, one would think this scenario has markedly improved. However, this is not necessarily the case. According to buy-side traders Coalition Greenwich spoke with, unreliable data mixed with misleading interest is decreasing the probability of successful risk transfer - while increasing the chances of information leakage. The “right” future state must combine reliable price discovery with safe trading conditions designed to minimize market impact.

Workflow inefficiencies: Fixed income markets lack the efficiencies needed to connect pre-trade information, execution and post-trade processes together. Outside information and systems are often not “open” enough to easily integrate into existing architecture. The result is a hodge-podge of data and workflow components that make it more difficult for the buy-side to navigate markets, risk manage and report where needed. What’s needed is better flow of data and other information pertinent to portfolio management decisions, execution choice and post-trade activities.

Transaction cost analysis (TCA) and best execution: A dearth of effective pre- and post-trade information coupled with a lack of streamlined processes is leading to less impactful uses of TCA and other analytics according to buy-side investors Coalition Greenwich spoke with. As is much of the case, all roads lead back to the desire for better data and technology. The culmination of better information – particularly through partnerships with counterparties – and improved processes and tools will lead the buy-side to the path of better execution.

All Roads Point to More Information-Sharing and Improved Technology

Finding liquidity may be tougher now than ever. While it’s clear several drivers have created today’s conditions, traders we spoke with have changed their thinking in order to trade what they want, when they want—and that includes turning to new protocols and mixing and matching technology to engage the markets. The buy-side is interested in better and cleaner data delivery from partners as well as improved methods to consume and analyze that information.

Following a long period of inertia, recent market challenges will be the next catalyst for the adoption of new technologies that facilitate true positive change. On the data front, traders have indicated that vast amounts of fixed-income data have become even less reliable, with volatility spikes and liquidity getting spotty. This means data is creating haves and have nots, as some market participants struggle to figure out ways to aggregate and consume information more effectively and to separate out the good from the bad.

Overall, there’s still a belief among bond investors that fixed-income data will, over time, continue its march forward via improved accuracy and timeliness. Change is in the air, as traders want to achieve better ways to trade electronically with more emphasis placed on workflow efficiencies. How quickly the buy-side gets to this state will depend on the willingness of traders to accept that some of the workflows and methods they’ve relied on in the past just don’t cut it anymore, and that it’s time to try something new. On the flip side, sell-side partners much be willing to become more “open” in terms of data delivery and more transparent to improve pre-trade analytics and electronic trading. Both sides of the market must work together to achieve the next steps.