July 09, 2013

Just like any species operating in the Darwinian world of natural selection, the buy side must adapt to new rules of the jungle to survive or risk extinction.

Buy side firms are dealing with market complexity, an avalanche of compliance rules and regulatory changes while their sell-side relationships are fraying under economic pressures. Add to that the elusive quest for alpha, and there is never a dull moment for the buy side.

In a recent whitepaper, “Survival of the Fittest Part III — Wish You Were Here,” Fidessa, a provider of trading technology, global connectivity and market data, examines the forces causing the buy side to feel alienated by the regulators.

However, new business models and workflows are emerging which can turn into competitive differentiators for the buy side, comments Fidessa’s Director of Strategy Steve Grob, in an interview.

Generating alpha across multiple, interconnected asset classes continues to be hard, so buy side firms are focusing on improving their decision-making process, wrote Fidessa in the whitepaper. There is an emphasis on feeding their models with better information rather than revamping their modeling programs, said Grob in the interview. “You can have an ever more complicated machine to make the decision or you can feed the machine more fuel to make better decisions,” said Grob in an interview this week.

Harnessing Past and Present
Another concept gaining traction is the “Investment Book of Record or IBOR to improve decision making. IBOR provides a view of the positions that have already happened from the back-office accounting system along with a forward look at future cash flows from events such as stock dividends. By paying attention to the current positions as well as the future events that are likely to happen around the instruments owned by a particular fund, this can enable someone to make a better decision, he said.

Looking for Alpha in All the Wrong Places?
Crowdsourcing is also emerging as another means of generating alpha, which amounts to using social media to follow other people and then convert their views into trade ideas. It’s important to work on blending the structured information that is validated with unstructured information that is incredibly risky and unproven. While crowdsourcing is in its infancy, the idea that the professional trading community can derive alpha from “the man on the street, is gaining traction, wrote Grob in his whitepaper. For instance, an index can be created around a the number of Twitter mentions a firm receives, which can be fed through an algorithm to gauge market sentiment, and then correlate that number with its stock price, said Grob.