As technology continues to reshape financial markets, the dynamic between buy- and sell-side institutions has undergone a transformation. Traditional boundaries are blurring as tools such as artificial intelligence, blockchain, and data analytics are disintermediating conventional trading workflows and enabling more efficient engagements. Relationships between the buy- and sell-side are evolving, with roles and responsibilities changing to accommodate new workflow behaviours.
Electronic trading capabilities have led to a major shift away from voice trading, and this has changed the role that counterparties play when they work together. Enhancements seen on the buy-side have lent themselves to more automation on the desk. These have allowed traders to reduce their reliance on the sell-side in the traditional capacity when it comes to smaller and easy to execute flow and focus their efforts on more complex orders and strategies.
In short, the buy-side is relying on the sell-side differently. But that’s not to say they don’t need them anymore. In today’s fragmented environment of platforms and venues, the act of sourcing liquidity has changed. The buy-side is therefore increasingly leaning on sell-side relationships to ensure access to all relevant liquidity pools and to guarantee best execution is achieved for their end clients. With this, sell-side firms are diversifying their offerings to meet these shifting demands.
“The buy-side pay all the bills in the industry – they decide whether they self-execute or execute through the sell-side. The decision process, in reality, is always with them. The more confidence the buy-side has in executing trades, the more the shift will continue,” argues Keith Todd, chief executive at Trading Technologies.
“There are, however, occasions where even if you’re a sophisticated buy-side trader, you may choose to use the sell-side because it gives you different windows and access to the market.”
Technology isn’t the only differentiator, Todd adds. “It’s training, experience and the circumstances.”
Evolving reliance on the sell-side
Buy-side reliance on the sell-side has shifted thanks to the rise in a more independent and data-driven approach to decision-making. Advanced analytics, direct market access, and AI-powered tools have given buy-side institutions the ability to carry out functions traditionally handled by the sell-side, such as research and trade execution.
“Already electronic execution and direct market access has reduced the reliance on sales traders to source liquidity,” emphasises Scott Chace, head of trading for portfolio solutions at State Street. “Artificial intelligence will likely cause an increase in the use of sophisticated technology where traders’ jobs are supplemented by machines and trades will simply be monitored by human traders. The reliance of traders as we know is likely to reduce over time as one trader will be able to efficiently handle a large number of transactions.”
In some cases, this shift of duties has reduced the buy-side’s reliance on sell-side expertise, allowing for greater autonomy in investment strategies. As a result, the sell-side has begun to offer value-added services, including bespoke analytics and strategic advice.
“As markets continue to increase broadly in complexity, buy- and sell-side relationships can and will take on a more strategic focus. What I mean by that is, it’s really important for both sides to understand priorities,” says Ed Wicks, head of trading at Legal and General Investment Management (LGIM).
“If you get it right, it allows both sides to understand the direction of travel that each other are taking and ensure they’re able to commit appropriate resources to given technology initiatives.”
To be clear, increased technology does not necessarily mean the buy-side relies on the traditional sell-side less, roles have simply evolved. The key strengths of the buy- and sell-side are completely different, and despite there being some overlap among firms, each organisation will focus on where it can add the most value.
Another key driver of this adaptation is the increased presence of additional liquidity providers within the landscape. Paired with the reduction in balance sheet seen by the traditional sell-side in recent years, the establishment of these more technologically focused liquidity providers has intensified this decrease in reliance on the traditional sell-side in some capacities.
Technological advancements are also bolstering peer-to-peer interactions among buy-side traders, through the possibility of more direct, efficient, and transparent communication and trading through decentralised platforms and advanced networking tools.
Jason Fromer, managing director, co-head of global fixed income trading at Manulife Investment Management, emphasises that credit traders are certainly benefiting from the growth of buy-side to buy-side, or “all-to-all” trading on a few specific platforms. “The additional pocket of liquidity certainly helps us get trades done and participate in the market in a way we could not a few years ago,” he notes. “We view this as a complement to broker led avenues of liquidity, not as a replacement.”
With electronic trading comes the added benefit of requiring less time to be spent on small trades. As a result of this, traders are left with increased capacity to focus more on executing larger orders and value-add idea generation for portfolio managers.
“The biggest potential negative [however] is that it reduces the overall touch points with the sell-side, possibly leading to weakened communication and relationships with sales and trading desks,” adds Fromer.
Less communication with the sell-side comes with the potential reduction in establishing valuable insights and relationship-driven benefits, which may negatively impact decision-making and market intelligence.
Echoing this, Will Winzor-Saile, managing director, execution analytics and architecture at Redburn Atlantic, notes that with fewer orders being received by the sell-side having a human element to them, this often means more of a quantitative focus on performance rather than service or content. “When managed well this adds a new dimension to the relationship, another point for discussion and collaboration,” he argues.
Trading desks and their make-up are subsequently continuously shifting, with technological advancements being a key driver for their change. “Head counts are evolving, as opposed to reducing, to meet the new needs of an organisation,” as Wicks highlights.
A way in which trading desks are keeping up with the pace of technological advancements is by maintaining a degree of nimbleness, allowing them to evolve and adapt to the changing needs of clients and organisations. However, with these advancements, practical skillsets should not be compromised or taken for granted.
“Many firms, particularly the large sell-sides focused purely on flow, will use technology as an excuse to juniorise or shrink a team. All this does is offset the technology gains meaning that you’re offering the same – or more likely, worse – service to your clients,” warns Winzor-Saile. “Having a quality, experienced team will always provide a better service than pure technology alone.”
For trading teams to be able to coexist and align with technological advancements, shifts do have to be made. Be it through diversifying the required skillset for a desk, shifting focus more onto monitoring, or creating more space to develop relationships.
To onboard or not to onboard
With the growing availability of technology, the challenge today lies in integrating the plethora of systems and platforms now on offer. If various counterparts are utilising different trading platforms, chat systems or voice networks, it can be extremely difficult for all participants to get a full view of what may be occurring in a specific trade. Interoperability is therefore becoming increasingly key.
“Once these technologies open up and allow the sell-side to share insights directly to the systems the buy-side are already using, all sides will see a big increase in productivity,” highlights Winzor-Saile. “This interoperability then allows things like IOI networks and block-matching tools to integrate much more seamlessly into existing workflows.”
With so many different vendors out there and technology providers offering a wide range of solutions, buy-side participants must be mindful when choosing the right ones for their desks. This all depends on what an institution’s underlying demands will be. Adopting new technology comes with a hefty cost and processes can be time consuming to ensure appropriate and successful integrations.
“It’s expensive to onboard [new technology], particularly because there’s always a new product selection process we need to go down and then there’s a lot of legal work that we need to get in place,” emphasises Cathy Gibson, global head of trading at Ninety One. “We have a responsibility to back the vendors that we think are going to be additive to our industry and sometimes we’ll win, but sometimes that will not be the case.”
While many new technologies come to market every year which many buy-side traders may consider as an added complexity to their day-to-day activities, there remain areas where traders are eager to see more technological development. Namely, primary issuance – the process in which new securities are created and sold to investors for the first time.
Although technology has streamlined a number of components linked to primary issuance, such as document preparation and data management, the complexity and need for human judgment has slowed down the pace of this becoming fully automated.
“Technology that is yet to really take off is an effective primary market workflow tool,” says Wicks. “New issue processes remain stubbornly manual and there’s already so much manual and voice interactions between the buy- and sell-side. This is an area where technology could and should help the buy- and sell-side to make this whole process more efficient.”
Maintaining relationships
Fostering personal relationships in a tech-driven world is essential to promote transparency, collaboration and market resilience. It is of huge importance that a bond of trust is established among counterparties to ensure relationships can grow.
“Real-time responsiveness 24 hours a day is most important and tech tools enable that,” argues Chace. “But they also promote transparency which is key to trust building.”
For a buy-side institution to transfer execution to a sell-side broker to execute on their behalf, there needs to be trust. Today, it is essential that these interactions are cemented by data and demonstrated by proof of trade execution on a best execution basis, as opposed to simply being based purely on pre-existing relationships.
“If a buy-side institution is becoming more automated and measuring brokers quantitatively then it’s essential that their execution goals are well understood by the sell-side and this can only be achieved through transparency and regular communication,” says Winzor-Saile. “Knowing what information is useful to the buy-side requires in-depth knowledge of their trading style and goals which is very difficult to automate.”
With increased adoptions of technological advancements, buy-side users also have to be more mindful about market resilience and maintaining stable markets. For the buy-side, having a range of sell-side counterparties can help reduce the likelihood of being impacted by any issues related to faults in technology. More specifically, ensuring that sell-side counterparts are not all using the same technology or trading strategies is paramount to reduce domino effects in a breakdown event.
“As the early days of Covid demonstrated, sell-side traders are an integral part of maintaining and cultivating partnerships, and ensuring access to breadth and depth of market liquidity during bouts of volatility,” notes Fromer. “A trading desk cannot rely on just one. It needs to assess the environment and specific trade before executing to ensure the best outcome for the client.”
However, for effective transparency to be achieved it is essential that technological advancements do not lead to the overstimulation of buy-side counterparts. Despite such activities coming with pure intentions, they can become counterproductive as they either require additional screen space or lead to spamming users.
“It is vital to understand the importance of quality over quantity. As a sell-side we should only send the buy-side information they care about, ensuring that it is clear and concise – that is best achieved by combining both human and technological approaches,” says Winzor-Saile.
In addition, technology can aid more positive engagements with second line risk and compliance colleagues. New advancements also enable the buy-side to benefit from straight through processing in the trading process, a key benefit for large trading desks.
The continuous advancement of technology is proving to be helpful in streamlining various trading processes, alongside helping bolster efficiency. The adoption of technology is undoubtedly resulting in shifts in the way the buy- and sell-side interact.
However, the value of these two separate counterparts is still proving key, despite an evolution in the way in which these two parties cater to each other.