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3 Trends Driving the Buy-Side to Upgrade Risk Systems
By Rob Garfield | June 12, 2018

Recent research by Greenwich Associates shows that buy-side firms are seeking more flexibility in their risk technology. In fact, of those surveyed in the buy-side RiskTech study:

  • 39% reported they want a greater ability to slice and dice data,
  • 37% wanted to overcome challenges with integrating different systems,
  • and 31% desire more flexibility to model curves any way they choose.  

For the majority of market participants, flexibility in risk modeling and other risk-related tasks has come via building the needed software internally and, more often than not, using Excel. With the exception of Bloomberg, which is nearly ubiquitous on the trading desk due to the high penetration of the Terminal, buy-side portfolio and risk managers most commonly rely on internal and Excel-based solutions to gain the flexibility they need. 

However, the Greenwich research also suggests that the buy-side is increasingly making the move to third-party platforms for their risk-management needs. Although somewhat counterintuitive, more than half the study participants utilizing outside solutions found them to be easier to integrate with other platforms both up and downstream.

Why Internal Systems Fall Short 

First of all, the complexities inherent in integrating Excel with enterprise systems need no explanation. I would say most of us are familiar with them. And while third-party risk-management platform providers must ensure their technology conforms with all industry-standard communications protocols, internal systems do not have that requirement. This might save development costs in the short term, but it also means integration with external systems requires new development, increasing the time to market.

This brings us to the second reason why the buy-side looks to third-party systems—a reduction in total cost of ownership. Trying to cut costs is certainly nothing new, but this is about more than that. In the past, lower cost generally indicated lower quality or flexibility of systems. Today, in most cases, those sacrifices aren’t necessary, making the lower cost and more robust solution a no-brainer.

Further, the cost of software development continues to rise as global demand for top programmers, data scientists and user-experience designers is going through the roof. Asset managers are not only competing with other financial services firms for talent, but with nearly every other growing industry around the world. Ultimately, managers are not in the software business, but in the business of generating investment returns.

As difficult as it is to develop a bespoke solution in-house, firms may miscalculate the cost and effort of ongoing maintenance factors which can dwarf the cost of initial development. The time, people and resource requirements to develop, test, integrate, and maintain software internally, therefore, would be better spent on the investment process itself.

In a business where information gathering and analysis is part of the secret sauce, some in-house software development will always exist. However, for the majority of enterprise technology, looking outside for that foundation is the way forward. 

For more insight on this topic, check out the Greenwich Associates Research Study: Developments in Buy-Side Risk Technology