By Steve Grob, Director of Group Strategy, Fidessa
Much has been written about the challenges facing the sell-side in the new world of high-touch regulation, fragmented liquidity and ongoing cost pressures. The buy-side is facing these challenges, too, but is increasingly taking the initiative itself rather than relying on its traditional sell-side relationships. Enlightened firms are facing these challenges head on and developing new business models and approaches at every stage of their workflow, from portfolio management and compliance through to execution and post-trade.
From the portfolio manager’s perspective, new and creative ways to improve decision-making are needed as generating alpha across interconnecting asset classes is proving to be beyond all but the most powerful modelling programs. However, instead of beefing up the program itself, the smart approach is to feed it with better information and empower decision-makers with a real time view that is much closer to both current portfolios and likely cash flows. Known as the ‘Investment Book of Record’ (IBOR), this concept still provides a combined view of positions but, crucially, looks forward rather than simply providing the statement of record.
Improved information flow is also central to an evolved compliance function. Ideally, every order will cascade through a series of firm- and fund-specific checks before it can be executed with minimal delay, especially important for orders in fast-moving markets. Increased public and private scrutiny of investment services means that firms that can prove that compliance sits at the heart of their operation are winning mandates over those that cannot. But meeting the demands of complex client mandates and a broader array of regulatory obligations means that the process has become an unwieldy overhead. Consequently, more and more buy-sides are rethinking the way they manage the process, adopting a firm-wide approach that can drill down into individual funds and orders, and mitigating the costs of trading out of a compliance breach by focusing more on prevention than cure. Certain firms are also developing a more workflow-centric approach that enables portfolio managers to stress test their orders in advance and receive relevant updates throughout the day.
This is all well and good but it is when orders reach the dealing desk that the extent of the current challenge really becomes apparent. Venue proliferation, HFT noise and IOI spam have made effective execution particularly challenging, especially for large-scale orders where buy-side dealers have simply hit a wall of complexity.
Previously, the solution was a reliable relationship with a trusted sales trader. But with individuals replaced by algos, an alternative is needed. Two approaches are emerging. The first is to outsource execution to firms with the volume or the technology to achieve better results. That technology includes sophisticated execution management combined with regulatory and reporting capabilities and effective TCA to prove executional prowess. This approach illustrates how the traditional buy-side/sell-side divide is being deconstructed into specialist providers that are expert at one piece of the liquidity puzzle.
The alternative is to simply trade with other willing buy-sides. However, prohibitively low hit rates aside, this approach risks upsetting the broker-dealer community as it withdraws client or proprietary liquidity. What is needed is an approach that gets the broker-dealer community on board and uses technology to align the trajectory of orders so that they are guided towards each other rather than leaving it all to chance.
As the previously clear distinction between the buy-side and sell-side is breaking down it is being replaced by a quest for buy-side firms to find counterparties that have the other side or will trade on risk. Like all market participants they are dependent on trust at a time when people and time are expensive commodities.
The evolution of the buy-side has also bought post-trade into focus: it is increasingly being seen as the new battleground in the war on cost. While critical to the process, varying proprietary methods offer no competitive advantage, leading the industry to explore more collaborative ways of working. The key to such collaboration is a centralised workflow based on open standards.
As an example, re-purposing the FIX protocol for post-trade leverages existing infrastructure and enables information to be persisted from front- directly to middle- and back-office workflow. As well as reducing errors, it creates the right conditions for shorter settlement times that save money, reduce risk and make better use of capital. Post-trade is one example of a new, more collaborative approach amongst market participants that sets aside competitive differences in the search for common ground that achieves industry-wide cost reduction.
However the buy-side chooses to adapt to its new world, the focus has to be on enabling smart workflow within the organisation and ensuring a seamless, secure flow of information both internally and externally. At the centre of the process is intelligently designed technology that provides robust foundations for that workflow, while providing the flexibility to evolve and form new partnerships. Firms that see technology in this way look set to become the evolutionary winners.
Shares and commodities keep climbing, so do bond yields
By Marc Jones
LONDON (Reuters) – World stocks headed back towards record highs with a third day of gains and the dollar dropped to a three-year low on Thursday, after top Federal Reserve and European Central Bank officials took aim at rising bond market yields.
There was a lot to keep tabs on. A renewed retail frenzy re-ignited the likes of GameStop, bets on $70 a barrel oil and a decade high in copper prices drove a commodity currency rally [/FRX] and bond yields were still rising too. [GVD/EUR]
A near 1.9% jump in oil and gas shares ensured European markets followed Asia’s overnight gains [.T][.SS]. MSCI’s main world index, which spans 50 countries, was up 0.5%.
“There are two clear stories now” said CMC Markets senior analyst Michael Hewson. “You have the concerns about rising yields and they are continuing to move higher today, and then you have got an economic recovery story, which is helping lift the more moderately-valued parts of the market.”
Federal Reserve Chair Jerome Powell said on Wednesday that U.S. rates could remain low for years, while ECB board member Isabel Schnabel was out early on Thursday saying it would fight any big increases in inflation-adjusted market rates.
“A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery,” she said. “Therefore, we are monitoring financial market developments closely.”
But bond markets are still not playing ball. Ten-year German Bund yields climbed 3 basis points in early trading. U.S. 10-year Treasury yields were near one-year highs at 1.42% and on course for the biggest monthly rise since Donald Trump’s 2016 U.S. election victory jolted markets.
In the FX markets, the safe-haven U.S. dollar slumped near three-year lows as the Fed’s stance, ongoing progress with COVID vaccination programmes and commodity market uplift boosted riskier currencies.
The Australian and Canadian dollars both hit three-year highs of $0.7978 and C$1.2503 per U.S. dollar respectively.
The euro touched a one-month high of $1.2183. The safe-haven yen and Swiss franc both weakened.
“It is pretty clear that there is a pretty strong concentration in the commodity currencies,” said Saxo Bank’s John Hardy. “Even with emerging markets you are seeing it to a degree,” he added, pointing to how big energy importers like Turkey’s lira had faded.
MARATHON NOT A SPRINT
Crude oil climbed to 13-month highs after U.S. government data on Wednesday showed a drop in crude output as a deep freeze in Texas disrupted production last week. [O/R]
Copper prices steadied near $9,500 a tonne in London. It’s now at its highest level in almost a decade and could log its biggest monthly gains in 15 years this month.
In a possible sign of a renewed retail-driven frenzy in equity markets, GameStop’s Frankfurt-listed shares trebled as they opened on Thursday, overshooting the videogame retailer’s 100% surge on Wall Street overnight.
Other so-called “stonks” – an intentional misspelling of “stocks” – favoured by retail traders on sites such as Reddit’s WallStreetBets had also leapt again, although explanations for the moves were tenuous.
Some online stocks watchers had even pointed to a picture posted by an activist GameStop investor of a McDonald’s ice cream cone with a frog emoji as a cryptic sign.
“It’s a marathon, not a sprint. Whatever happens resist the urge to sell. The longer we hold the higher it goes,” said @catchme1fyoucan, one user in Italy of the retail trading platform eToro, in a discussion on GameStop.
(Reporting by Marc Jones, editing by Larry King)
Sterling steadies above $1.41 as risk currencies gain
By Ritvik Carvalho
LONDON (Reuters) – A rally in risk currencies on Thursday helped Britain’s pound steady near $1.41, a day after it hit its highest levels in nearly three years.
Sterling surged to $1.4295 on Wednesday, as analysts maintained a positive outlook on the currency.
Bets that Britain’s vaccine rollout will enable a quicker reopening of its economy and relief over a Brexit trade deal have pushed the pound up 3.5% against the dollar, making it the best-performing G10 currency this year.
U.S. Federal Reserve Chair Jerome Powell on Wednesday calmed fears that higher inflation would also lead to a tapering of monetary stimulus, saying the central bank would not change policy until the economy was clearly improving.
On Thursday, a broad risk-on tone in markets after Powell’s assurances spurred a rally in commodity-linked currencies such as the Canadian, Australian and New Zealand dollars and the Norwegian crown, pushing the dollar and other safe haven’s lower. [FRX/]
“Classical FX havens are weakening (CHF, JPY) and risk currencies such as GBP and NOK are performing well as U.S. rates are now rising in tandem with equities and commodities,” said Lars Sparresø Merklin, senior analyst at Danske Bank.
The pound is correlated with risk and growth and tends to gain along with risk-on plays in markets. It traded 0.1% higher at $1.4163 by 0911 GMT. It was 0.1% lower to the euro at 86.22 pence.
Issues over Brexit still simmer, although analysts maintain they won’t hurt the pound in the short to medium-term.
Northern Ireland’s first minister upped the ante on Wednesday in a dispute between the UK and the European Union over trade with the province, calling on Prime Minister Boris Johnson to “step up and protect the United Kingdom”.
Earlier, the UK and the EU held talks and agreed to press on with work to resolve the difficulties that have impeded deliveries of goods, notably food, from other parts of the United Kingdom to Northern Ireland and caused some shortages in supermarkets.
The dispute, which was heightened when the EU involved Northern Ireland in a COVID-19 vaccine ban, has cast a shadow over a post-Brexit trade deal agreed late last year and threatens to further sour future ties between the neighbours.
(Reporting by Ritvik Carvalho; editing by Larry King)
FTSE 100 climbs as recovery bets boost mining, energy stocks
(Reuters) – London’s FTSE 100 rose on Thursday, helped by mining and energy stocks that tracked higher commodity prices, while Standard Chartered dropped after its annual profit more than halved due to the impact of the COVID-19 pandemic.
The commodity-heavy FTSE 100 index was up 0.3% by 0808 GMT, with mining stocks, including Rio Tinto, Anglo American, and BHP, gaining between 1.5% and 3.6% on higher metal prices. [MET/L]
Oil heavyweights BP and Royal Dutch Shell also provided the biggest boosts, with gains of 1.2% and 0.8%, respectively. [O/R]
The domestically focused mid-cap FTSE 250 index rose 0.2%, led by industrials and consumer discretionary stocks.
Standard Chartered PLC fell 3.3% despite restoring its dividend and reaffirming its long-term profit goals.
Anglo American gained 3% as it boosted dividends after strong commodity prices helped the diversified miner recover from coronavirus disruptions suffered in its first half.
Outsourcer Serco Group Plc rose 8.3% as it reinstated dividends and raised 2021 forecasts, after posting a 20% jump in annual revenue.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
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