As demand for better execution continues to rise, broker-dealers need to stay ahead of the game by investing and innovating their technology stacks.
Buy-side firms have different investment objectives and benchmarks, so there’s an open competition between brokers where they have a particular strategy that has a particular benchmark, said Joe Wald, Managing Director and Global Head of Electronic Trading at BMO Capital Markets.
There have been many more buy-side institutions adopting a wheel methodology globally, where they allow a number of brokers to participate on that wheel and compete for execution quality.
According to the Coalition Greenwich report Globalization of Algorithmic Equity Trading: A Buy-Side View, “while roughly 58% of traders in North America look at performance against peers and performance vs. estimated cost models, only 35% of those based in E.U./U.K. do so with the former, and just 22% the latter. The lower use of peer analysis in E.U./U.K. could be due to relatively lower use of algo wheels (for example, our research shows 25% of European managers use algo wheels versus 30% of those in the U.S.).”
“That’s been a big shift and a change in the tools that the buy-side uses, and definitely a change in the way that the sell-side has to respond in terms of making investments in their technology stack, in their algorithms, in their people on the quantitative side, and their coverage,” Wald noted.
According to Wald, technology innovation is critical to being able to perform as the demands of buy-side institutions for the best quality execution have grown exponentially.
“The intent there was to really bring that new technology to bear to a broader audience of clients, including direct institutional clients from the BMO side, and innovate on how we can perform on people’s wheels and how we can leverage new venues and new order types to drive greater execution quality,” he said.
“We definitely see a lot of other competitors out there looking to try to leverage technology in similar ways,” he added.
Wald said that there are places where vendors make a lot of sense, but it’s really important to be able to focus on or have the ability to focus on the things that can make a difference.
“Picking the right things to outsource and picking the right things to invest in – make the most meaningful difference in terms of differentiating your product and the outcome your client gets,” he said.
With the wave of digital transformation, there has been a major increase in tech spending. According to the latest forecast by Gartner, worldwide IT spending is projected to total $5.1trn in 2024, an increase of 8% from 2023.
While generative AI has not yet had a material impact on IT spending, investment in AI more broadly is supporting overall IT spending growth, according to the report.
“Tech spending is the only thing that continues to go up, even in times when market cycles are tough,” commented Wald.
