The COVID-19 pandemic has changed the way everyone does business.
This holds especially true for those in the business of trading. Whether one is a broker or buysider, maintaining commissions or generating alpha has become more of a challenge in this new remote trading world. Both are faced with creating more efficiencies and employing new and at times new and untested technologies to select, deliver and execute order flow.
So, how does a manager or brokerage achieve his objectives in this new market dynamic?
According to Mark Pumfrey, Global Head of Equities at Liquidnet, survival is via collaboration and cooperation. Trading has long been a dog-eat-dog world but those days might be behind an industry that is struggling to maintain liquidity, efficiency and profitability. Pumfrey spoke with Traders Magazine Editor John D’Antona Jr. to discuss his views on the buyside, its need for change and a fresh approach and what the future might hold.
Traders Magazine: As with most industries, the pandemic has transformed the fortunes of the asset management world. What do you anticipate the fallout to be?
Mark Pumfrey: Managers have seen their performance, assets and revenues fall. We can expect further tightening in the months ahead. But even before the pandemic, many asset managers knew that efficiency was a priority. Fees have tightened and revenues have been under pressure, as the exodus away from active management persisted.
The pandemic will accelerate this process and encourage firms to actively explore business concepts that may have once seemed counter-intuitive.
TM: What are some of these ideas?
Pumfrey: Many asset managers have spent the last decade retrenching their business model, cutting costs and trying to ride out the wave of fee cuts. These efforts have been less than fruitful. We predict then that managers – both new and established – will start working together to solve the liquidity, investment insight and capital challenges that will define the next 10 years.
Technology and data are the connective tissue between buyers, sellers and products. Instead of taking a protectionist stance and continuing to build or negotiate deals on a solo basis, asset managers will better utilize and share technology to create direct, seamless access among network participants, promoting a unified financial marketplace of sorts.
TM: What does this collaboration between managers look like? And how would it be beneficial?
Pumfrey: Imagine research, data and insights from across a range of sources, delivered directly to trading desks and investment teams. Direct connections and data sharing can help participants find liquidity that lit markets may lack.
The Amazon Marketplace is an inspiration for this model, where a variety of third parties come together to offer products on a fixed, transparent price alongside the owner’s offerings. You have the ability to identify the products you need and to see the cost and terms at which a product is offered.
On Amazon, healthy competition and collaboration has reduced costs and made delivery of products efficient. More importantly, this network provided a highly-visible platform for independent vendors to reach audiences at a scale that would have previously been impossible. In asset management, we need network facilitators that can amplify the effect of collaboration in the way that the Amazon Marketplace has done for its users, especially as pressures on fees and costs continue to rise, while access to liquidity, insights and capital becomes more complex.
This sort of collaboration will require facilitators to deliver benefits similar to a utility (i.e. efficiency, keeping costs for end users low) but, at the same time, retain an innovative mindset and remain open to new participants who wish to play by the same rules.
TM: Do you believe that collaboration is possible? Will managers be resistant?
Pumfrey: The invisible hand of the free market will convince those managers that may be hesitant. The decision to collaborate will be driven by self-interest and is highly rational. Those managers that work together to provide liquidity and services in a more efficient manner will attract more business, at a time where institutions will become far more selective with their spend and allocations.
It will likely take some time for this model to emerge. Managers are still in crisis mode, reacting to the realities and limitations of a dispersed workforce while steeling themselves for further market dislocation. But when the dust settles and the time comes to make strategic decisions, this unified financial marketplace will gain traction.
TM: What other strategic business shifts will asset managers make?
Pumprey: Specialization will be important as it provides opportunities in areas that incumbents may not have the capacity to service.
Look at small-cap equity research coverage as an example. Specialists have had some challenges gaining traction as many major banks have sought to fight harder for research business, but there’s little way that a bank’s research team can be all things to all people. Once participants realize the value they can achieve by working collaboratively, we’ll start to see more people advocating this approach.
TM: Do you think managers will be encouraged to pursue more innovative business approaches? Or will they remain conservative?
Pumfrey: We were already heading towards a new equilibrium in the supply and demand of goods and services in financial markets which is driven by commercial reality. Volatile markets will turn things on their head, as participants scramble to protect themselves; but once the dust settles, this momentum will resume.
The pandemic has only strengthened the case for wholesale changes to the business of asset management. With pressure tightening, managers will need to find a balance between making pivots while not wasting time experimenting or making mistakes. Collaboration will help reduce the risk of such pivots and improve how the asset management world operates.