There is an undisputable shift in the relationship between the sell side and the buy side. The balance of power is no longer overwhelmingly tilted towards Wall Street and the City, which was the case up until the 2007–2008 crisis. Stricter and more demanding regulatory requirements for financial service providers and the acceleration of tech innovations in financial services – FinTech – are the main drivers that have reshaped the rules governing the relationship between the sell side and the buy side.

It used to be that the sell side, with its few players and ever-increasing concentration of power over its clients (i.e. the buy side, which includes asset managers, mutual funds, pension funds, hedge funds, etc.), was acting more like lords. Nowadays, even though the buy side and the sell side continue to need each other, their relationship is rather one in which “The dealer has essentially been demoted from maître d’ – deciding where everyone sits and recommending dishes – to a waiter taking orders”, as described in a Bloomberg Markets article “The Rise of the Buy Side”.¹

As a result of the regulatory changes, the sell side (i.e. the JPMorgans, the Goldmans, etc.) have reduced their balance sheet activities, pooled back from risk-taking and, in several cases, pulled out of market-making activities. At the same time, buy-side firms (i.e. the Blackrocks of the world) have accumulated more inventory of assets and are, in many cases, in more need of the type of tools for analysis and risk management that the sell side customarily provided for them.

The current era is a customer-centric one. This is true not only for the end-user, the individual or otherwise (referred to as retail), but also at the B2B level. The buy side is the customer and the invisible market forces are pushing towards empowering them.

The Sell Side’s Reaction to the New Era

Given the new reality imposed on the sell side, there has been ever-increasing pressure to restructure the business units serving buy-side clients that otherwise were significant sources of profitability.

A few of the large bulge bracket firms have chosen to divest their business units of portfolio and risk management analytics. These are businesses with multi-asset capabilities that had been built over years. Barclays, at the end of 2016, sold Point, their risk analytics and index business, to Bloomberg. UBS sold Delta to StatPro, a cloud-based performance and analytics provider for the buy side. Citi has spun off the legendary Yield Book analytics group and is looking to sell or IPO (public offer) this subsidiary. JPMorgan continues to operate and enhance JPMorgan Markets. Credit Suisse also maintains Locus.

The only sell-side company that is acting more like a platform is Goldman Sachs. They had developed an in-house portfolio and risk management system that was clearly ahead of its time 20 years ago:

Securities Database, also known as SecDB, allows users to test out potential trades and assess the risk of those positions… it was so guarded that chief operating officer Gary Cohn said he wouldn’t sell the rights to use the technology for US$1 billion—maybe for $5 billion, the Journal reported.²

Deutsche Bank and the likes were salivating in the previous era, to licence such a system. Fast-forward to today and this same sophisticated risk management tool, whose key technology is a relational database (instead of the commonly used sequential databases), is being offered for free to Goldman Sachs’ clients. This tool, along with free access to Marquee (software that integrates Goldman Sachs technology for the entire trade cycle) and Simon (a structured products marketplace), are empowering buy-side clients for their needs across the entire life cycle of an investment. 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 phone 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.

SecDB is mobile and can capture cross effects and domino effects in a complex portfolio, and calculate real-time, meaningful and more accurate risk metrics. This is the technology that allowed Goldman Sachs to navigate the 2007–2008 crisis in a much better way than other sell-side firms, even though they were actually deeply involved.

Rest-of-Market Positioning in the New Era

Asset owners are either individuals or institutions. Both groups either choose to manage these assets on their own, or choose a buy-side entity to manage their assets (an asset manager, a hedge fund, a pension fund, a mutual fund, etc.).

The buy side remains loyal to the ubiquitous Bloomberg Terminal and many FinTech incubators continue to deter early-stage entrepreneurs from attempting to disrupt that positioning. The Bloomberg portfolio and analytics platform, PORT, is being transformed by offering buy-side clients (that are already Bloomberg Terminal customers) a pay-as-you-go-type app store for their mobile needs and additional FinTech modular services. The Eikon Thomson Reuters offering is also adding value, with a desktop and mobile version, and an app store with improvements in its analytics capabilities and continuous integration of FinTech capabilities.

Several FinTech start-ups are targeting asset owners directly, with an offering that empowers the buy side or do-it-yourself (DIY) asset owners.

Robinhood, a zero-commission equity broker, is an example of eliminating brokerage fees in equities and exchange traded funds (ETFs) (operating in the USA and Australia for now). Robinhood continues to build partnerships that (directly or indirectly) empower the buy side and independent asset owners. For example, a collaboration with the investment research network Closing Bell, which serves independent and buy-side analysts, traders, investors, wealth managers and Wall Street research firms; a partnership with the social trading network StockTwits and the crowdsourced hedge fund platform Quantopian.

Alpha Modus offers bespoke solutions (Mods) that are truly alpha-generating strategies. It is bringing the cognitive capabilities of IBM Watson to financial markets (for now only for US equities) to design customized alpha-generating algorithms tailored to any buy-side investment philosophy. For example, an Equity Tactical Mod, which is a smart beta strategy based on taking positions on the S&P 500 and the Euro Stoxx 50; the Early Look pre-15:45PM EST Imbalance Meter for NYSE-listed stocks, which captures unstructured imbalance information starting at 14:50PM EST through 15:45PM EST each afternoon. The Mod store offers an alternative approach to asset management.

Electronifie and Trumid are one entity as of March 2017, focused on improving trading conditions for corporate bond investors. Their unified platforms aim to improve transparency, price discovery and liquidity in the corporate bond market, in which the buy side holds most of the inventory. Empowering the buy side and corporate bond asset owners is paramount in a fixed-income market which, despite continued strong bond issuance, faces huge liquidity and fragility problems.

Contineo, out of Hong Kong, is creating a community and a platform for wealth mangers and private bankers to access issuers of equity-linked structured products. This is an over-the-counter (OTC) market that is in great need of more transparency, flexible product design and post-trade management. A market that Simon on the Goldman Sachs platform is also serving.

Conclusion

Regulation has changed the relationship of the sell side and the buy side. WealthTech is an unstoppable trend that continues to transform this relationship. This tech-enabled push started from outside Wall Street and the City, from FinTech start-ups, and continues within the digital transformation of sell-side companies (e.g. Goldman Sachs, JPMorgan, etc.).

On the one hand, Goldman Sachs from the sell side is leading in making a bold choice to empower its buy-side clients with its free, sophisticated tools. The longer-term strategic vision is to become a platform (on which value is created) serving the buy side. It remains to be seen whether others who have not divested their portfolio and risk management capabilities (e.g. Morgan Stanley, Deutsche Bank, Credit Suisse, etc.) will follow suit as part of a broader “platformification” transformation that empowers their buy-side clients. In five years’ time we probably won’t be using the terms sell side and buy side any more. We will be focused on the customers, the clients, the asset owners or gatherers and the platforms that serve and empower them.

On the other hand, and at the same time, FinTechs will continue to empower asset owners with tools that lower costs, offer transparency, enable the faster and better discovery of opportunities, and are customized or contextualized. Services that were only available in the past from the sell side, which led to an imbalanced relationship between the sell side and the buy side, in favour of the former. The next phase or level of empowerment for asset owners will come with the integration of these scattered FinTech tools on platforms.

Last but not least, traditional data and analytics providers like Bloomberg and Thomson Reuters are also transforming their offerings and empowering their clients, by creating app stores and integrating FinTech tools in their mobile platforms.