The 2019 Fixed Income Technology Landscape
Part 2: Assessing your Technology Stack
In Part One of our series surveying the operational landscape fixed income asset managers, we discussed the unique challenges investors face while using suboptimal third-party systems in an environment that is rapidly adapting to technological advancements. This Part Two of a four-part series explores how investors should address those pain points in their business processes, examine available technological improvements, implement new models to streamline their workflow and prepare for the future impact of automation and artificial intelligence (“AI”) on investment tools.
Investors can generally take one of two approaches in building out their technology systems, front-to-back systems and best-of-breed applications or tools. Asset managers need to consider whether they want an all-in-one package that will provide straight-through-processing for front, middle and back office functions, or are looking for best-of-breed applications to facilitate the separate elements of the investment process.
There are many front-to-back systems that exist for investors to choose. A prime example comes from Bloomberg. The Bloomberg Terminal provides users with security and market data, risk models and analytics, an order management system, an execution management system and trade confirmations. Bloomberg’s system excels in certain areas such as market data but falls short when it comes to operational functions. Beyond functionality, a system like the Bloomberg Terminal will cost an investor over $20K per terminal per year while also locking users into a multi-year contract. EZE is another vendor that offers front-to-back tools; the vendor provides a suite of applications for different functions of the investment management lifecycle.
Front-to-back systems carry the main advantage of being integrated systems that have several applications interfacing seamlessly with one another across the front, middle and back office. Front-to-back systems also reduce technology risk, including issues such as implementation time and budget overrun. Managers appreciate the simplicity of maintaining a single supplier relationship relative to managing connectivity with several vendors. Front, back and middle offices can share a single database creating an easy and efficient flow of data between business groups.
While an integrated front-to-back office system offers significant advantages in terms of a simplified technology infrastructure and straight-through-processing, the main drawback is that front-to-back systems often come at the expense of limited functionality. Rather than doing everything very well, users tend to find front-to-back systems perform their functions at a satisfactory level but not as efficiently or proficiently as it could be done.
Investors can alternatively build a best-of-breed system by customizing a suite of the strongest applications they need to facilitate their unique investment processes. The number of best-of-breed tools greatly outnumbers the amount of front-to-back-systems. Tools such as Blackrock Aladdin, Market Axess and Simcorp IBOR are examples of the types of tools investors will use concurrently. Blackrock Aladdin works as a tool for an order management system amongst other things. Market Axess is an execution management system in which investors can trade electronically. Simcorp IBOR streamlines and easily maintains compliance and accounting functions. Used together, these tools offer the asset manager the ability to effectively handle the entire investment lifecycle.
Best-of-breed tools are generally more user-friendly and perform specialized functions better than the comparable solution in a front-to-back system. However, these systems are typically limited by an application’s ability to connect and interact with systems and tools from other vendors. Maintaining multiple systems provides limited out-of-the-box cross connectivity, which creates maintenance and integration challenges. Information technology teams (IT) and investment operation resources are required to maintain these points of connectivity and overcome the challenge of integrating tools and systems. As an organization expands and requirements multiply, best-of-breed systems may not be able to handle new requirements, forcing the addition of another system or tool.
*For illustrative purposes only. List not comprehensive.
Many things need to happen before deciding whether to employ a front-to-back system or a best-of-breed solution. Choosing the best option for your firm requires senior managers and stakeholders to conduct a thorough operational review of the business. This includes defining the system requirements to facilitate the investment process; considering the capabilities and limitations of the IT organizations; and conferring with personnel in the front, middle and back office to understand available support resources.
Beyond these preliminary steps, firms should develop a long-term technology strategy that has buy-in across the organization before evaluating different options to pursue. Only once the strategy is formed and buy-in is fostered is the organization properly armed to evaluate whether a front-to-back or best-of-breed solution is best for them. Considering the pros and cons to each approach, it is even more important for managers to involve their entire organization in the decision-making process.
If a firm does decide to employ a best-of-breed strategy, they will need to focus on how the tools work together to create an efficient ecosystem. The ability to create a functional ecosystem is essential for success because workarounds or connectivity limitations will undermine the effectiveness of any single tool, inevitably resulting in more manual processes or redundancies. The table below illustrates that while there are many technology vendors, there isn’t one that does everything that is needed in the fixed income lifecycle.
Part three of this series will explore how developments in automation and AI are streamlining processes to allow asset managers to utilize their tools of choice and optimize strategies to capitalize on synergies and minimize deficiencies.
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