Improving the customer experience

Client service and profitability

 

Technology is changing the workflow at buy-side firms, improving efficiency and speeding up execution.

To adapt, sell-side firms have invested heavily in technology to serve clients that now want more access to data, more speed, and more accuracy. The sell side is now forced to confront digitalization in a way they haven't before, from mobile and challenger banks, high-frequency e-trading, robo-advisors, blockchain, to the rise of AI, machine learning, and natural-language processing for trade automation.

"There is now more storage and tools available for traditionally non-technical people to work with data in a sophisticated way. Market color doesn't cut it anymore; firms want insights, and clients are asking for better tools," said Matthew Rees, Global Head of Electronic Trading Sales at Bloomberg.

The technological changes are transforming some parts of the relationship between buy side and sell side. Savvy firms are finding ways to deepen the relationship by improving customer service.

But while infrastructure needs have increased, resources haven't. Sell-side firms today are having to deal with an increased workload with fewer people.

More data, more tools

Sell-side firms are adapting to the buy side’s increased focus on client communications – beyond investment reports or client statements. Changing client expectations about personalization and transparency, as well as increased regulatory requirements, are fueling demand for customization and near real-time information in multiple formats.

Firms are moving away from legacy or homegrown solutions into creating integrated data and reporting platforms that also include some degree of automation. Almost all, or 90-100%, of buy-side client reporting is now automated, according to Accenture.¹ Today’s reports rely heavily on data visualization and web portal or mobile access.

As a result of these changes, sell-side firms have to provide more data to feed into those systems. Data needs to be multi-sourced, scrubbed, and consolidated. At a recent panel at Bloomberg's 2019 Sell Side Enterprise Forum in London, buy-side panelists emphasized the need for more accurate data, while firms are under pressure to create more transparency. That can only be done with quality, up-to-date data from multiple data sets, such as pricing, reference, and alternative data.

Automation is also changing sell-side businesses. Automation tools in electronic trading are speeding up the e-trading landscape. What might take 20 clicks and 30 seconds in a fully manual workflow can be completed in just over a second with no clicks at all in a fully automated workflow.

Trade automation will transform how buy-side traders engage with the sell side, creating challenges but also opportunities for sell-side firms looking to serve clients more efficiently. For example, a recent survey found that U.S. heads of trading say order routing is the most important criteria to incorporate into one’s automation strategy.²

 

As part of this move to an automated workflow, the process of selecting counterparties is becoming automated. This creates some uncertainty for the sell side, as firms don't fully know how they are being scored or selected. The details might be fuzzy, but firms know broadly that they are being measured on transaction costs and execution as well as market impact. With MiFID II, the ability to demonstrate and document a trade has become more critical than ever. Data quality and accuracy are essential.

This uncertainty around new automated counterparty selection has sell-side firms slightly concerned. Buy-side firms can give the same banks high- and low-touch trades or turn to

different banks. At the Forum, 47% of participants identified greater competition in the secondary market as the most significant factor impacting the relationship with the buy-side. Sell-side firms are seeing clients turn to new entrants using the latest technology. In Europe, which is more fragmented and has more players, it's even more competitive than the U.S.

A changing relationship?

Given all these additional demands, the nature of the relationship between buy-side and sell-side firms is changing in some ways. Using technology, sell-side firms can become more of a partner to clients, better understand what clients want, and do more with fewer resources.

Though buy-side clients still value liquidity, they are also looking for help with data, algorithms, and other skills. With AI, data analytics, and access to real-time data, sell-side firms can gain better customer insights and serve buy-side clients more efficiently and with a higher level of customized service.

 

Applications can help sell-side sales and trading teams pull together information about client orders, trade history, open positions, public holdings, RFQs, private portfolios, interest rates, as well as notes about client interests and other relevant information. Information that the salesperson or trader would usually have to pull up manually can be aggregated and presented instantly. Algorithms can help traders identify trading opportunities or provide pricing information that can help win trades.

Relationship fundamentals remain the same

Despite these new demands, buy-side leaders agreed that the core of the relationship with sell-side firms is fundamentally unchanged. Relationships are still meaningful, and a healthy rapport remains invaluable. Part of the business is becoming more low-touch and automated, but much remains high-touch.

With high-touch trading, buy-side experts said they value firms that can offer liquidity, take risks, and with whom they have strong relationships. Underlining the importance of relationships:

Among the most significant factors impacting buy-side performance are changes to sell-side sales trading coverage. While sell-side firms are focused on building up their technological prowess and offerings, firms should keep in mind that relationships still make a difference.

Another factor that can't necessarily be solved with technology is liquidity. At the Forum, buy-side panelists expressed frustration that crucial price-makers struggle to take risks on large trades. It also takes longer to transact in certain markets. This is one area where advancements in electronic trading don't make a difference since electronic trading doesn't create liquidity.

Changing demands from the buy-side are creating new challenges and opportunities for sell-side firms. To navigate this evolving landscape, firms need to keep integrating new technologies that augment core competencies, helping them stay abreast of developing client needs.

1. Accenture, Technology Trends 2017
2. Automating the Trading Desk: The Race to Perfect the Workflow of Tomorrow, WBR Insights, 2019, p. 9.