Asset managers spend more than 80 percent of their technology dollars simply maintaining existing operations. With regulatory changes and trading spanning more types of assets, “the buy side has a situation of underinvestment which is unsustainable,’’ research firm Celent said.
Fund managers and other institutional investors spend more than 80 percent of their technology dollars simply maintaining existing operations. Only 20 percent gets spent on developing new software and technology.
With regulatory changes multiplying and trading spanning more types of assets, “the buy side has a situation of underinvestment which is unsustainable,’’ research firm Celent said.
In particular, asset managers are facing broadening mandates from their customers and must carry out their trading over more venues and more types of assets than just stocks.
In North America, asset managers can no longer just focus on stocks, Celent said in a report released Friday on “IT Trends and Spending Implications for the Securities and Investments Industry.”
“Due to investor requests to be serviced with all investment choices, investment firms have and continue to diversify their own portfolio such that now they offer investments in all asset classes with a global mandate,’’ the firm’s securities and investments research team said. Compounding the problem: “Multiple and redundant systems from past mergers and acquisitions.”
Also confronting asset managers: “a large portfolio of regulations,’’ from the 2010 Dodd-Frank Wall Street Reform Act, which is forcing the creation of a whole new set of electronic trading systems for trading in standardized forms of interest-rate and credit-default swaps, as well as the Basel III reforms, which are requiring firms to set aside more capital as buffers against market risks.
That, Celent says, means “the next few years (is) a period where we will see dramatic change in the way firms handle all aspects of their IT business both internally and externally.’’
That change will come, it said, as software suppliers consolidate and broker-dealers that handle transactions for fund managers cut back their operations, as they face margin pressures.
Buyside firms, which already have been adopting order management systems, execution management systems, algorithms and smart order routing for foreign exchange and equities trading, will “naturally gravitate” to adopting such systems for fixed-income trading as well.
Asset managers also will have to create new mechanisms for connecting to and interacting with swaps execution facilities in the United States, multilateral trading facilities in Europe and a host of other new types of trading systems, globally.
The proliferation of regulatory reporting requirements, as well as asset classes and venues they must deal with, “will force buyside firms to spend increasing amounts of money to standardize data and create a seamless way of getting that data across the entire firm’s investment system,’’ Celent said.
Celent did not quantify the amount of increase it expects asset managers will have to put into their spending on information systems.