Eugene Grygo, Chief Content Editor, FTF News
Are buy-side firms starting to shift more funding toward IT and data for trading and securities operations and away from compensation for front-line traders?
The most recent answer appears to be in the affirmative, according to a new report from market research firm Greenwich Associates, which chronicles how “technology spending is crowding out trader pay on institutional trading desks.”
“Overall, buy-side trading desk budgets are expected to hold relatively flat in 2018 at $17.3 billion industry-wide,” according to the report “Investor Spending Reaches Equilibrium — For Now,” which was released to Greenwich Associates clients earlier this month.
The shift toward technology and away from trader salaries has been relatively recent.
As of 2015, “institutions were spending an average of almost 70% of overall trading desk budgets on trader compensation, with the remaining approximately 30% going to technology,” according to the research report’s findings. “In 2018, that allocation is expected to shift to just 60% compensation and 40% technology.”
“Although part of this year’s shift can be attributed to the effects of new MiFID II rules on research and pre-trade transparency, the more general increase in technology spending at the expense of trader compensation represents a secular trend,” says Kevin McPartland, head of Greenwich Associates market structure and technology research, and co-author of the new report.
Fixed income trading has seen “much of this increased spending” as firms clamor to access electronic trading venues, according to the report’s authors. In addition, a big driver for the greater technology spend has been the need for more relevant data and “the analytics to put that data to work,” researchers say.
“Until very recently, most asset managers viewed their trading desks as a cost center,” says Brad Tingley, institutional analyst for Greenwich Associates and the second author of the report. “Today, they are seen as profit centers due to their ability to create an advantage over competitors with better execution,” Tingley adds.
The greater demand for the right data extends across multiple asset classes, and while the expected magnets for technology spending — market data terminals and order management systems (OMSes) represent “approximately half of technology spending on institutional trading desks,” things are changing. “However, these allocations to ‘hardware’ have decreased slightly as a share of the overall technology spend, as institutions place an increasing value on data,” according to the research.
In particular, firms are spending more on IT that facilitates improved transaction cost analysis (TCA) and risk management, “which encompass a variety of tools including quantitative models, portfolio construction, counterparty risk calculations, and others,” according to the research. “This trend could intensify going forward now that MiFID II is live in Europe and U.S. investors are preparing for the SEC’s proposed order transparency rule.”
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