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For years the Sell side was the incubator of financial innovation and the marketplace where products and services were designed and the platforms where market making and execution took place. The Buy side, were the institutional clients!
The buy side players have always included at hedge funds, asset managers at institutions, mutual funds and pension funds. Despite the fact that individual investors are technically on the buy side, the term has usually been reserved for professional money managers. Only recently, maybe, with the explosion of Fintechs democratizing the investing space that has been traditionally only available to professionals or HNW; we can broaden the definition of the Buy side.
For all kinds of asset classes (equities, fixed income, derivatives, structured products, ect), we all understood that the Sell Side was the service provider and in the driver’s seat or the power position; whereas the Buy side was the client. It was traditionally, a Sell-side market. The competitive advantages were on the Sell Side, the proprietary algorithms were mostly on the sell side. The Buy Side was captive (partly or wholly) to the Sell Side, in ALL the phases of the trading life cycle. Starting from portfolio construction, research, product discovery, execution, and post-trade monitoring.
Fast forward, to our customer centric era and ask yourself:
Is the Sell Side, still the Sell side and the Buy side, still the Buy side?
A 35,000 feet look
The Buy Side is still using the ubiquitous Bloomberg terminal or the Eikon Thomson Reuters tools.
Fintechs wanting to become the alternative ubiquitous interface for most of the phases of the trading cycle, continue to popup despite the fact that VCs and accelerators don’t recommend this subspace (“Forget about creating the next Facebook or Bloomberg terminal; look at AI and ML and Big Data and pick your focus”).
All the Fintechs that can potentially be part of the next generation platform that is mostly used by the Buy Side; are directly or indirectly empowering the Buy Side.
The Sell Side was into market-making, proprietary trading, brokering, and investment banking. Expensive and proprietary tools were developed in-house to support the lucrative businesses of running large books, taking risks, and market-making. All these businesses have been shut down by the regulators and the otherwise perceived competitive advantages, i.e. the proprietary software tools, have lost their resale value and their potential to generate revenues.
The Sell Side, has a Treasure in their vaults that is worthless for them (at least as used in the past) and is valuable for the Buy Side (it always was). The Sell Side can and should empower the Buy Side. Much like Google empowered me and you, and all the relevant B2B users, by offering its open source solutions on its platform.
Goldman Sachs is leading by example: “The Buy side empowers the Sell Side”
Gain a perspective from one of the many web-based applications, SecDB, that Goldman Sachs has developed in house:
“Securities DataBase, also known as SecDB, allows users to test out potential trades and assess the risk of those positions. Up until now it was so guarded that chief operating officer Gary Cohn said he wouldn’t sell the rights to use the technology for $1 billion—maybe for $5 billion, the Journal reported.” Source
SecBD, was initially developed to manage inhouse complex derivative positions. It grew into a sophisticated risk management tool, that professionals can use to integrate new information or change parameters for their decision making. It became the Risk management Bible, on your smartphone. Deutsche bank and the likes were salivating in the previous era, to license such a system.
Fast forward to today! Goldman says : “Just take it, for free” to its Buy Side clients.
So, what has happened that led GS to offer SecDB for free to its clients instead of of some sort of revenue sharing agreement with them.
Goldman Sachs is empowering all its trade-prone customers, the Buy Side!
Goldman has publicly confessed that they are sharing for free with their Buy Side clients not One but Three applications.
SecBD has already been mentioned. SecDB is able to calculate 23 billion prices for 2.8 million positions and 500,000 market scenarios (Source: FX Magnates). Marquee (maybe in honor of CIO R. Martin Chavez, known by everyone as “Marty”) and Simon (Structured Investment Marketplace and Online) are the other two. Simon is focused on structured products and helps clients design products based on their hedging needs or investment views; instead of spending hours on the phones between with Sales and Trading. Goldman Sachs aims to increase their equity-linked note business and to become a platform for brokers or other distribution channels that have access to a broader Buy Side segment. Marquee is the software that integrates Goldman Sachs technology for the entire trade cycle.
Source: Business Insider
The Buy-side is empowering the Sell-Side. Goldman Sachs is leading the pack. In five years, we wont be using these terms anymore, as the platforms that can integrate all the parts of the trade cycle, will be what matters. Whether they originated from what we called “The Buy-Side” or the “Sell-Side” or the from the “outskirts” of the Wall, won’t be of essence.
The digitization of the Buy-side will be synonymous to becoming a platform empowering the Sell-Side.
The Buy-Side maybe the biggest threat to the vendors or the platforms traditionally serving the Sell-Side.
It will be a Sell-side market rather than a Buy-Side market.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.Like This Post