Creating a smart desktop strategy to enable alpha generation is an important challenge to overcome for the buy-side and the sell-side alike, as outlined in our earlier article The road towards a smart desktop strategy is riddled with challenges (Read it here).
An ecosystem – a data exchange with low barriers to entry and integration costs - which allows the sell-side and vendors alike to deploy their data and for the buy-side to consume the data in a systematic way, remains an aspiration. There are, however, a number of issues which our roundtable of some of the leading global buy-side and sell-side firms identified which, if addressed, could create the right foundations for the smart desktop strategy of the future.
The first challenge identified is one of scale vs customisation. To be successful, both sell-side firms and vendors alike need to achieve the right balance between building something that has traction and applies to as many clients as possible, while exposing enough API to allow for modularity which enables the more sophisticated clients to assemble the information for themselves. This is critical as the customisation requirements – however large or small - will be different for different firms.
The second challenge identified is one of consolidation of multiple data feeds. Many buy-side firms are centralising their execution function and segregating their portfolio managers from liquidity issues to allow them to focus on long-term alpha. This creates a requirement for the execution function to consolidate multiple data feeds from multiple liquidity providers and vendors, across asset classes. In the absence of a commonality of language between the sell-side, the buy-side needs to normalise the data streams and adjust them internally. This is currently inefficient and requires a huge amount of resource.
The third challenge is one of economics. While there are some vendors acting as consolidators, the price for this single point of connectivity is currently too high to be economically viable. There are some examples, however, in specific asset classes where that consolidation work - Neptune in credit, FXSpotstream in currencies, which act as a layer of connectivity that standardises and makes onboarding easier - these are examples which can be built upon to deliver a cross asset solution.
The final and perhaps biggest challenge is one around standardisation. Getting data in and enabling communication typically relies on standardisation. While many sell-side firms have internal frameworks for people to collaborate and agree on how various components are going to interact with one another, using proprietary sell-side standards for interoperability is problematic for buy-side firms who are dealing with a dozen liquidity providers.
In the absence of such standardisation, collaboration between firms around what a shared language should be an important part of the picture. For such collaboration to be meaningful, it is critical that any consortiums avoid being run purely by technical people and thus risk being decoupled from the business case. The real business value is to be found when two counterparties have a conversation about enabling a workflow which allows them to implement a standard that works in practice. This, in turn, will deliver network effects which will result in further adoption. While seemingly less ambitious than full-on standardisation, this gradual approach appears to be a good place to start.
This article is part of a three-part series which explores the desktop strategy of buy-side and sell-side firms, looking at the challenges faced today and exploring possible solutions.
Article I "The road towards a smart desktop strategy is riddled with challenges" Click here >>
Article III "A smart desktop strategy starts with getting the house in order first" Click here >>
CEO and co-founder,
Adaptive Financial Consulting Ltd