It’s no secret that buy-side firms hold an impressive amount of influence over the average financial investor. From carefully researching securities on the clients’ behalf to purchasing assets in order to turn a profit, buy-side firms hold remarkable sway on the stock market. Indeed, much of what they do is largely shrouded in mystery, leading many people to wonder what are buy-side firms, and what resources do they use to operate? Unfortunately, for many, this enigmatic pipeline only serves to deepen the intrigue further.
Buy-Side Firms and the Challenges of Disruptive Technology
The Buy Side Firm holds an elusive deal origination process, arguably the cornerstone of their ability to close reliable leads. Yet, very little is known about buy-side M&A (mergers and acquisitions) — and buy-side firms are content to keep it that way.
Nevertheless, technology is dramatically changing the way these companies cultivate their closely guarded secrets. Moreover, thanks to these technological advancements, buy-side firms find unique ways to make their clients profitable, further deepening the intrigue surrounding their operation.
How Technology is Impacting Buy-Side Firms?
Surprisingly, much of the buy-side of the investing industry has been recalcitrant about adopting newer technology, hindering the success of any pending buy-side projects. For example, a recent study from State Street’s annual “Growth Readiness Study” revealed that only two-thirds of buy-side respondents were ready to embrace alternative data (such as social media posts, transition data, and foot traffic). Furthermore, some expert reports suggest that most buy-side firms lag behind anywhere between five to seven years on their technology.
Private equity analysts collect and study data
Nonetheless, it’s clear that these technologies are unquestionably shaking up how these private equity analysts collect and study their data, both facilitating and streamlining both their collection and interpretation methods. As a result, the question is no longer a matter of private equity vs. hedge fund, but rather, buy-side firms vs. technology. This includes the use of AI, blockchain, robotics, and rapid data analysis. And for many of them, there’s no turning back once they start putting these vital resources to use.
Benefits of Buy-Side Firms Adopting Technology
The benefits of implementing this new technology are numerous. For example, in the past, the buy-side finance analysts needed to manually sift through data to collate it and make sense of it, a lengthy and laborious process. However, thanks to introducing new data collection techniques, it is now easier than ever for them to collect and interpret the data they need. For instance, a sleek combination of natural language searches and machine learning (ML) can help automate this process.
Buy-side firms can use boolean results to expedite research
Rather than spending time manually plugging inquiries into a system, these buy-side firms can use boolean results to expedite research. Studies have shown that up to 40% of a buy-side analyst’s time is wasted on this task, but embracing these technologies could help facilitate automation and efficiency. The same can be said for shifting to cloud computing. By migrating their existing systems over, these firms may find themselves with better flexibility, more powerful processing, and greater ease of scaling.
Artificial intelligence (AI) and machine learning are also integral. Today’s increased trading volume and data highlight the necessity of these two technologies. While it may have been feasible to avoid using these tools two decades ago, they are all mandatory today. For instance, AI algorithms can help take the guesswork out of educated guesses. By predicting trade patterns and deducting the direction in which a security may go, the risk of loss can be sharply reduced.
Blockchain causing a shift in buy-side trading
Another technology causing a dramatic shift in the buy-side of trading is the adoption of blockchain. A startling report from Goldman Sachs, one of the Top 100 buy-side firms in the world, revealed that the use of blockchain technology could reduce IT costs and labor, saving banks $6 billion per year when used for settlement and clearing. Buy-side firm analysts could also reap similar benefits, boost efficiency, reduce overhead and regulatory costs, and minimize costly trading errors.
Challenges for Adopting Technology
Despite the evident benefits of embracing this technology, many buy-side firms still cling to antiquated data acquisition methods, underscoring one of many differences between buy-side vs. sell-side firms. Understandably, many challenges come with successfully adopting it. For example, replacing their existing infrastructure would come with significant expense. In addition, updating existing databases and systems to integrate novel digital solutions would also require both time and financial resources, as well.
Upgrading systems require trained technicians
In addition, upgrading systems require trained technicians and, once completed, a firm’s existing staff would need training on their use. These upgrades would take time and capital to both implement and ensure the buy-side firm’s employees are comfortable around them. Buy-side firms need to recognize this, and drawing up a roadmap can help guide them throughout the process. Otherwise, these changes can lead to a loss in earnings, which all companies strive to avoid.
Risks for Not Adopting Technology
Nevertheless, failure to adopt this technology could lead to an even greater loss of capital, potentially causing the ultimate dissolution of a formerly successful buy-side firm. Take, for instance, something as basic as client perception. While this may not seem significant, especially if a buy-side firm has a solid history of profitability, it doesn’t change the fact that clients do have certain expectations. Thus, if they find that the buy-side firm is not up to date on technology, they may decide to take their business elsewhere.
Firms that fail to adopt technology are doomed
Ultimately, buy-side firms that fail to adopt technology are doomed to be less successful than their competitors. Refusal to take the time to assess and find ways to update inefficient internal legacy platforms can put a buy-side firm at a serious disadvantage. Not only does upgrading these systems reflect a move into a more productive and lucrative future, but it also shows that an analyst is still firmly on their toes when compared to their competition.
By taking the time to carefully weigh the pros and cons of adopting these technological advancements, both a buy-side and the sell-side firm can not only stay one step ahead of their competition but also the market itself. Their methodical legwork can ensure their client remains profitable and they remain solvent. In addition, in being proactive about researching and applying these breakthrough technological methods, they can help see that they are still around when today’s technology emerges as tomorrow’s metric.
Image Credit: julia larson; pexels; thank you!