There is a clear argument emerging that one of the key differentiators of performance between fund managers is not necessarily what assets they pick, but rather how efficiently they pick them. This allows them to reduce their costs and thus increase the returns they can extend to their investors.
One of the key ways of doing this is for the buyside to adopt electronic trading technologies and systems According to participants at a Sibos panel discussion including a broker dealer, and three sell side institutions, what the buyside needs to think about is how to get the most from these electronic services rather than just adopting the new, new thing.
Services like direct market access, algorithms and programme trading are being adopted with varying speed and vigour in various geographies around the world and by the different types of buyside managers. Nevertheless, electronic trading is here to stay and being used more and more.
According to Marcus Consolini from SWIFT, 50% of fund managers now use electronic trading for 20% or more of their business; some use it for 100%.
Loomis Sayles is one such firm. According to Jan Snitzer, the STP project manager at the firm, the efficiencies of using electronic trading are huge. She says her firm has been able to decrease the number of traders in the firm by 17% and increase the amount of trading done by 45%. Moreover, the firm has halved the number of cancel or correct trades. This shows the "huge efficiencies" that electronic trading brings.
However in Asia, the adoption and use of electronic trading is not as advanced as in the US and Europe. This is mainly because some markets do not allow it and some stocks are so illiquid that they do not warrant the cost. However, having the capability to trade electronically is a key way of managing the volatility in the markets, especially for sellside brokers.
"Electronic trading allows you to do internal rationalization in the face of extreme market volatility," says T. Rajah, the CIO of CLSA. He explains that if the trading volume of one stock or market increases by 15 times due to an external event and then falls back down again, it is more efficient to handle that increase electronically than manually.
Despite these benefits there is still reluctance on the part of some buyside managers to switch to electronic trading. Firstly this is because they only see the move in terms of costs. But this is a dangerous way to see the movement. "Cost comes in many more forms than investment in technology," says Rajah. "One of which is human error." But ironically it is the prospect of human error on the inputting of trade orders electronically that puts some on the buyside off using electronic trading.
For these managers, the telephone is just fine, even though they realize they are being somewhat antediluvian. But Rajah says that the biggest problem he faces in getting his clients onto electronic platforms is the huge number of different standards prevalent in the concentrators of order matching systems. "Our biggest problem is the number of different standards in the concentrators in Asia," he says. "I think the only thing that is standard about FIX standards is the name."
The big picture benefits of adopting electronic trading are clear enough. However the individual circumstances of particular traders, working for particular firms, in particular markets means that the prospect of universal adoption is still some way off. Add in the regulatory hurdles in Asia and the goal looks somewhere over the rainbow.
