Buy-side firms spent more than US$12 billion globally on their trading desks last year, investing primarily in technologies and people, according to research from consultancy Greenwich Associates.
Fixed income trading in particular has seen heavy investment during 2014 as firms prepare for major market structure changes, which will see large volumes of bond trading move onto electronic marketplaces.
Approximately two third of budgets supporting buy-side trading desks was spent on trader pay during 2014, with much of the remainder invested in technology.
Around 60% of the technology spend was used for fixed income solutions to help desks get ready for significant changes in the way fixed income products are traded. Total spend on fixed income technology was up 11% compared to 2013.
Bond trading has traditionally been heavily focused on voice trading with bank counterparties, but a reduction in sell-side inventory as a result of Basel III capital requirements and other regulations means an increasing number of trades are taking place on electronic platforms offering an all-to-all trading model.
The large investment made by institutional investors in fixed income trading indicates many are preparing to begin trading on the broad range of new and upcoming bond trading platforms.
However, fixed income trading personnel also saw their budget increase during 2014, highlighting the need for buy-siders to retain top talent in bond trading.
“Although the fixed-income market is awash with new data and trading protocols, relationships are still king,” said Kevin McPartland, Head of Market Structure Research at Greenwich Associates. “The best technology platforms are of little use without traders who know the unwritten rules of trading bonds - especially when volatility comes back and interest rates rise.”
By contrast, FX trading spend has remained relatively flat between 2013 and 2014, while spend on equity trading has increased slightly.
Market data terminals and order management systems are the top two technology expenses for buy-side trading desks in 2014, representing 53% of total spend. The need for up to date market data, and its high cost, has been consistently recognised as a major issue for institutional investors, while order management systems have become integral to firms in order to manage significant electronic order flow across multiple asset classes and markets.