Why Technology Is Determining the Winners and Losers in the Volatility Game

From Twitter trends to trade wars, in today’s global economy everything has a knock-on effect. In a volatile market like 2019, where are the opportunities for firms?

Market volatility influences sell-side, broker dealers, asset managers and proprietary trading firms. High market volatility tends to make for more interesting markets and can create some exciting yet choppy trading conditions.

But whether volatility is high or low, for asset managers, it’s about being able to trade a wide variety of strategies, in the conditions they are presented with. In addition, controlling the cost of execution has become a key lure when an asset manager is presenting value to their clients. It is all part of the drive towards best execution that’s been brought about by financial regulation.

As a consequence, asset managers are driving a hard bargain, using relatively new tools like transaction cost analysis to directly compare their execution counterparties. Asset managers are now able to look across a list of, for example, 8 or 10 counterparties and break down the cost and quality of their execution based on timing, liquidity, arrival price and much more. Thanks to technology, the cost of execution is no longer “grey.”

Sell-side firms have always competed against each other for asset managers’ business – that is nothing new. However, as the equity market has become more and more fragmented with alternative exchanges, dark pools and systematic internalizers – where a firm uses their own internal book of liquidity to match orders – the competition to be smarter than their peers has driven the development and importance of technology for the sell side.

With the diversity and multiplicity of trading venues, smart order routers, for example, have sprung up. These allow sell-side firms to find the best price and volume from multiple venues in the blink of an eye, and then execute trades automatically.

Smart technology is also helping the sell side source liquidity from all over the market, accelerate performance and launch new products while also handling internal requirements like trade monitoring more effectively than ever.

Bottom line: technology is separating the successful asset managers, banks and brokers from the rest of the pack.

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Tags: Investments, Technology