Buy-Side System Requirements Part Two

July 15, 2015

Technology Trends That Can Provide a Competitive Edge

  • Move towards single technology solution, for analytics, trade capture and enterprise risk control, with coupling between front, middle and back office functions
  • Straight-through-Processing that starts from trade execution all the way through to central clearing
  • Independent margin calculation and swaps portfolio pricing tools
  • Reconciliation tools that can account for margin call discrepancies, either at the CCP or clearing intermediary level or both
  • Transaction Cost Analysis (TCA) tools that can incorporate data from the trading process as well as integrating back office data into the trading process

Given a collateral-centric swaps workflow involves numerous challenges and encompasses ever-changing technology demands, the leading investment managers are examining integrated front-to-back systems that can provide a complete solution for all of their analytics, trading and risk requirements, both for today and in the future. In addition, a sizable number of firms are using the platforms that their clearing brokers provide and that integrate seamlessly with their middle and back office functions. This allows them to report aggregate risk exposure in addition to developing P&L accounting systems in a Straight-through-Processing (STP) workflow that copies the entire front-to-back process. Working alongside are the necessary risk analytics systems and Transaction Cost Analysis (TCA) tools. 

The goal is to optimize and streamline the entire workflow, to ensure greater trade transparency and enterprise-wide reporting. Each function largely depends on the other: the pre-trade function relies on asset and ancillary services; trading depends on pre-trade functionality; the back office depends on STP from the middle office. 

The ideal workflow creates a closed loop on risk and valuation data, as well as strategic information relating to TCA. Funding can only be optimized, latency reduced, trade costs cut, and Best Execution mandates be met when this high level of workflow visibility and seamless connectivity is achieved.


Systems Rethink

Market and regulatory changes are forcing firms to re-think their business operating models. Increased complexity and uncertainty have motivated forward-looking firms to avoid stop-gap measures and replace legacy systems with a new generation of holistic trading and risk management software that supports front, middle and back office requirements across all assets. Business models cannot be altered in isolation. Supporting processes and systems also need to be aligned with the evolving business models.

Over the past few years there have been considerable improvements in the technology available to deploy and integrate financial software, boost usability and speed of processing, and improve flexibility, be it the increase in computation power, simplicity of data management, the advent of cloud computing, or more powerful APIs for easier integration. Any systems rethink needs to be done with a view to benefit from these improvements. The technology should be designed to improve front office, risk and financial control functions by ensuring consistent risk management analytics and reporting are shared across all business environments.


"Leading investment managers are examining integrated front-to-back systems that
can provide a complete solution for all of their analytics, trading and risk."


Key Considerations for buy-side Systems

In today’s fast paced environment buy-side firms require technology that can work faster, perform better and scale with their business. The rapid pace of innovation in technology presents a whole new range of possibilities for how this technology can be leveraged. Buy-side firms that make good choices and manage their technology will be in a significantly better position in terms of operating costs, their ability to measure and manage risk, and to understand profitability across the organisation. Any major redesign of systems should be based on a thorough analysis of the firm’s immediate and future strategy as well as leveraging the best technology available. 

Cross-asset and multi-strategy support

Opportunities created by banks exiting markets for asset classes deemed risky by the regulators and quest for higher returns in a low interest environment are forcing buy-side firms to actively consider a broad range of strategies and asset classes. Sophisticated firms need to have the flexibility to implement multiple strategies across different asset classes. To achieve this, the systems they use need to be geared to support multiple strategies spanning multiple asset classes. 

Integrated analytics, trading and risk platform across a heterogeneous portfolio

Traditionally, in buy-side institutions front office and middle office users have leaned towards using specialized systems that suit their functions but do not necessarily integrate well with each other. Portfolio managers and traders in the front office have used tools providing strong analytics and pre-trade analysis to make portfolio composition and trading decisions. Middle office and operations teams have preferred systems that are light on analytics but offer a secure, auditable and versioned platform for portfolio and risk management functions.

In the developing environment, lower yields coupled with higher transaction costs are squeezing returns. Pre-trade analysis has to consider the cost of funding collateral required to post margins and the cost of funding regulatory capital when evaluating the profitability of a strategy. This calls for a very high level of integration between front office and middle office systems across all asset classes.

Robust risk management and control

Pre-crisis risk management was primarily focused on market risk. Yet, even that did not adequately take into consideration extreme scenarios, fat-tails etc. The ensuing regulation requires more stringent market risk management with greater focus on stress-testing of extreme scenarios. Equal emphasis has also been placed on other risks like counterparty credit, liquidity and operational risks. Any systems being considered should have capabilities to measure, monitor and manage these risks at an enterprise level across multi-asset portfolios. 

Operational efficiency

In an environment where opportunities are limited and transaction costs high, operational efficiency becomes key to the success of any organization. Systems that facilitate optimum action in a timely manner by integration, flexible workflows, and ease of communication will be key to competitive advantage. 

Business intelligence and transparent reporting infrastructure

Data warehouses and reporting engines that facilitate aggregation and analysis of data and analytics is key to any systems infrastructure. Reporting engines need to be able to aggregate data across all asset classes and present an integrated view of risk and P&L. Reporting capabilities need to be flexible to serve the needs of portfolio, risk managers, investors and regulators. Ideally the system should also allow for integration with a third party business intelligence or data visualization tools available.

Delivered on state of the art technology platform

Market participants are turning to a new generation of technology to allow them to meet increasingly demanding business requirements while improving flexibility and reducing costs. Distributed NoSQL databases provide a scalable and cost-effective alternative to expensive relational databases for data intensive workloads. Cloud platforms such as Amazon AWS and Microsoft Azure offer many advantages (e.g. flexible provisioning, competitive pricing, built-in redundancy) for solutions that support cloud deployment. Modern multi-core, vector-enabled CPU’s are much more powerful than the previous generation, however pricing and risk libraries must be designed to take advantage of these new features. The low cost of memory has enabled new in-memory analytic technologies to be developed that support analysis of massive data sets in near real-time. Mobile (touch-based) device support is increasingly a requirement but requires the adoption of new development frameworks and design patterns.

Low total cost of ownership (TCO)

Sufficient consideration needs to be given to the total cost of ownership of the system. Any analysis of costs has to take into consideration licensing costs, implementation costs, operating and support costs, as well as disaster recovery costs.



The credit crisis and the regulatory response it spawned have fundamentally reshaped financial markets for buy-side firms, however, while the changes have brought about challenges, they have also ushered in opportunities. The key to success will be the speed with which firms are able to understand the changing marketplace and adapt their business models to align with these changes. 

Changing business models need to be supported by corresponding changes to business processes and systems. The next generation of buy-side systems will need to:

  1. Support multiple strategies across broad range of assets
  2. Be integrated across heterogeneous portfolios
  3. Enforce prudent risk management and control
  4. Facilitate operational efficiency
  5. Provide timely business intelligence and transparent reporting infrastructure
  6. Be delivered on state of the art technology platform
  7. Deliver all this for a low total cost of ownership


Part 1

Buy-Side System Requirements Part One

Recommended Whitepapers & Articles

Whitepaper: Buy-Side System Requirements
Conversation with Brian Naini, Chief Risk Officer, Channel Capital Advisors
Buy-Side Risk Analytics, Chartis
Technology Trends in Asset Management