Buy-Side Diversification May Leave Front Office Floundering

Going about change in a piecemeal fashion can lead to unwanted results.


The buy side is paying increased attention, and investing larger amounts, in its back office and data management capacities, as it goes in search of further diversified products, but John wonders what effect this is having on the front office.

A few weeks ago I wrote a column about the changing nature of the foreign exchange (FX) market and how I had predicted some of these changes in an earlier feature. While I'm not going to re-tread that same ground, the theme of diversification is everywhere at the moment.

While for some it's not all sunshine and happiness, asset managers seem to be running with the idea and have set about hunting down new products in emerging markets to bolster their portfolios.

The reasons for doing so are not particularly new, with the exception of Brexit, and one of the main drivers of change is, unsurprisingly, regulation.

Waves of regulation that have either come into force or are due to hit the markets in the coming years are causing participants of all breeds to adapt to new environments, so much so that I've heard it referred to as "the new normal" god knows how many times.

The result of this is that far more money is being spent by asset managers on back-office capabilities than before, primarily to sort out long-standing data management and storage issues; consequently the front office is seeing far less investment than it used to.

Order management systems (OMS) and execution management systems (EMS), algorithmic trading and smart order routing platforms, decision-support tools, transaction-cost analysis (TCA) platforms; the historic investment in the front office has been first and foremost to the buy side, but the increasing importance of data management, visualization and analytics means those systems are being left behind.

The practice of getting an execution system in place or deploying a new algorithm is not an ongoing process: once the system is in place, the firm can let it be and go about other activities. The risk here is that while pursuing new product areas or markets, these systems may no longer be optimal, or worse, fit for the task.

This is not always the case though. Chicago-based Ativo Capital Management recently overhauled both is back- and front-office and gave Waters a detailed look at how it achieved this and the objectives behind the project.

The bottom line here is that diversification is a force for good in the capital markets, and change is a necessary part of growth. The way to go about that, however, is not piecemeal; like so much else in this space, holistic approaches usually yield the greatest rewards and by focusing too much on the here and now ─ back office and data ─ asset managers may find they no longer have adequate tools at the business end.

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