FLASH FRIDAY: Strengthening Buy-Side Trading Workflow

Anna Lyudvig

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

Dan Royal

To stay competitive in a constantly evolving environment, buy-side traders need a scalable, data-driven system that has the right balance of decision support and workflow automation. 

Trading desks tend to be the intersection of investment needs across the entire firm, and often those needs and workflow can vary greatly, said Dan Royal, Global Head of Equity Trading, Janus Henderson Investors. 

As desks seek best execution across multi asset and multi strategy requirements, “workflows and technology support become paramount in efficiency, accuracy and risk mitigation,” he argued. 

He said that workflow optimization provides the foundation for efficient order handling, improves efforts in seeking best execution and helps mitigate risk. 

“They allows desks to do more with the existing team and potentially reduce the odds of a risk event,” he said.

Matt York, Global Head of Buy-side OMS & Compliance at Bloomberg, said that workflow sophistication is “key to removing friction in processing and normalizing the traders’ interaction with their order flow and is key to efficient and consistent ways to automate their low-touch trades”. 

“Standardizing their order handling and allowing them to consistently perform order implementation with as few clicks or interactions as possible is the goal,” he said.

According to York, market structure has materially changed in the last 5-10 years. 

He said that liquidity has greatly fragmented, creating challenges in sourcing of consistent data, liquidity and appropriate benchmarks. 

Moreover, coupled with a more stringent regulatory oversight and adjustments to managers order and execution policies around best execution, policy adoptions have put a greater burden on the trader to evidence their stock selection from more venues, in smaller size, with greater frequency and utilizing an ever greater number of algorithmic trading strategies, he said. 

Matt York

“All while fee compression means a constant pressure on costs and an overall shrinkage of desks. Sophistication needs to be applied through every part of the traders role to allow them to remain competitive and exploit the opportunities in this ever changing market landscape,” he added.

York said that the role of a buy-side trader has evolved from more of a processing specialist between the portfolio manager and the broker into alpha generating specialist constantly looking at execution quality and the benchmarks used to judge best execution. 

Traders are using current disparate market signals and prior-trade history to evaluate appropriate execution strategies all whilst minimizing information leakage. he said.

Speaking on the current trends, York said there is a focus now on optimizing workflows allowing a trader to minimize operational risk and focus efforts on high-touch, less liquid order flow while low-touch flow is automated. 

“We need to constantly focus on where to use intelligent automation to cut down the operational burdens that are distracting a trader from the key value add of their role,” he stressed.

“If you look at the evolution we have seen in portfolio trading in ETFs, for example, the process of create/redeem of ETFs with in-kind lists of securities displays the power of an integrated OEMS. The process of basket formation, risk profiling and optimization whilst taking into account compliance constraints is tricky,” he added.

He further said that automation is only as good as the data utilized to evaluate automation rules. An integrated OEMS allows for deeper discovery of previous trading patterns, client constraints, and directions. This comes along with interactive capabilities between portfolio manager and trader, which is more difficult with added latency and integration risk in standalone solutions.

Kevin McPartland

According to Kevin McPartland, Head of Research, Market Structure & Technology, process automation is high on nearly everyone’s priority list for 2022.

“But since no one works with a single technology provider anymore, more automation requires disparate systems communicating with one another without months of development,” he said. 

When asked about challenges around front to back-office workflows, Royal said that he believes that it starts with communication. 

“Dynamic connectivity between groups remains critical to maintain an efficient and accurate settlement process. Any technology supports that effort is necessary, yet if the two areas don’t leverage their strengths, the risk can increase,” he said.

When asked if buy-side traders prefer to work with a single vendor or spread their technology investments, Royal said that single vendor provisioning in specific areas of the workflow is certainly “preferred”.  

However, the reality of utilizing a single vendor across a wide array of workflows is generally not feasible, he said.

“Each provider has their strengths and capitalizing on those areas of expertise, innovation and flexibility are necessary to remain competitive in an evolving landscape,” he said. 

Meanwhile, York said buy-side traders should not need to have a preference: “However, COO’s and CTO’s certainly would prefer the single vendor solutions as a way to minimize costs and complexity of their target operating model.” 

“From a buy-side traders’ perspective, they want solutions that give them the maximum access to data, liquidity, and venues for execution without creating additional friction,” he said.

York said that recognizing that in this ever fragmenting world that workflow sophistication has to straddle multiple players and participant firms, he sees the focus on interoperability staying front and center.

Meanwhile, Royal said that sensible improvement in order automation and liquidity capture are evolving.  

“Given the unique demands of integrating AI into the trading workflow, efforts to facilitate multiple vendor harmonization onto a trader’s workspace should be in the mindset of developers,” he said.