It is said that data is the lifeblood of the trading desk – and in that regard buy-side firms who manage the flow most efficiently can realize a vigor that improves performance and provides a competitive edge.
David Csiki, Managing Director and President at INDATA, noted that for many hedge funds, wealth managers, and other institutional investors, the ingestion, curation and consumption of data is at an inflection point: what was once automatically a cost center is now potentially a profit center.
“Data analytics has evolved from a largely esoteric endeavor for only large firms with large budgets, to a practical exercise with applications within the day-to-day activities of most buy-side firms,” Csiki told Markets Media. “The technology itself is now fit for purpose in terms of being able to deliver actual ROI.”
Csiki added that advances in technology, concurrent with advances in the tech-savviness of buy-side professionals, have elevated data analytics from largely the realm of IT to a key front office function. “Traders and portfolio managers are beginning to look at data analytics as part of their core front office systems for trading and portfolio management, with the expectation of these solutions delivering actionable insights to help them do their jobs better and create alpha for their firms,” he said.
Optimizing data analytics also generates the less quantifiable benefits of freeing up wealth managers to focus on what they do best: manage wealth. According to a McKinsey report published in January 2022, relationship managers spend 60 to 70 percent of their time on non-advisory activities such as account servicing and other administration, post-advisory, and regulation and compliance. Obstacles to reducing non-advisory time include multiple systems for client information access and analytics, no integrated research platform, and no pre-advisory customer risk analytics.
“A few leading wealth managers are using technology to provide RMs with the tools to serve clients more efficiently and effectively,” the McKinsey report stated. “Some have taken a zero-based approach, rebuilt their tech stacks and embraced advanced analytics to inform more personalized services. By providing targeted solutions, these firms have been able to boost revenues and reduce operational costs.”
Wealth management firms that invest in data analytics can expect to see benefits in acquisition and onboarding, engagement and deepening of client relationships, and servicing and retention, according to McKinsey.
API’s ‘Crucial Role’
While the need for better data analytics spans asset classes, fixed income – with its sprawling size, lack of standardization, and uneven pace of electronification – may best illustrate the challenges, and the opportunities, institutional buy-side firms face.
According to a Coalition Greenwich report published in Q4 2022, 77% of fixed income investors employ a mix of quantitative and fundamental strategies and want better data analysis tools. Pre-trade analytics, including pricing tools, was highlighted as an area especially elevated by technology.
“Improved technology, such as the adoption of the cloud and greater use of application programming interfaces (APIs), has fostered more predictive measures and fast-paced analysis – important developments during periods of unusual market activity and volatility,” the report stated.
“APIs play a crucial role for data analytics in investment management as they are the means by which the data itself is able to be integrated into a given data analytics solution,” Csiki said. “The better the API, the better the integration, which is a significant competitive advantage for any investment management firm.”
In a rapidly evolving marketplace with exponentially larger data volumes from even just a few years ago, investment managers risk being left behind if they are tied to outdated operating systems and legacy technology. This can manifest itself in the common “pain point” of too much time and resources needed to implement and integrate data analytics solutions into trading and portfolio management software systems.
Going forward, the evolution of data analytics on the buy side will enable smaller and mid-sized firms to better compete with the larger firms who have historically dominated this area.
“The tech stack of the average wealth management firm is going to advance significantly for early adopters, which will create a more level playing field for firms of all sizes,” Csiki said. “Data analytics is the foundation of this tech stack, along with the cloud and also emerging AI-based tools.”
Added Csiki: “The true power of front office systems used for trading and portfolio management on the buy-side not only resides in the automation, time savings, and transparency that they provide but also in the data that they maintain.”
Read INDATA’s recently published thought leadership on this topic: Future Proofing the Front Office: Data Analytics Powered by APIs – Solving the Data Challenge
