How collaboration is transforming the relationship between sell-side and buy-side financial markets


One of the most important dynamics in almost all industries today is how value creation is increasingly shifting to be between organizations rather than within organizations.

Most notably, the nature of client-supplier relationships have dramatically shifted over the years.

This is not new. I have spent considerable time working with the institutional financial services sector, and seen major changes over the years. I recently recalled a White Paper I wrote years ago, How Collaborative Technologies are Transforming Financial Services, in the wake of a Collaboration in Financial Services conference I co-organized and chaired in New York.

Here is an excerpt from the White Paper. The same issues are still playing out today.

At the highest level, there is no question that collaborative technologies will impact the structure of the financial services industry. The implications may take some time to be visible, however the shifts in power and value creation between industry participants are already evident.

One of the most obvious examples is in the relationship between buy-side and sell-side in financial markets. The availability of information and the concentration of analytic capabilities in the buy-side has shifted the balance of power, and made the value proposition of financial market sales activities ever more tenuous.

In considering the future of the bank dealing room, some believe that much of the activity will shift to online trading, requiring far fewer traders and salespeople. However if salespeople can create value collaboratively with their clients, this can significantly change the dynamic at play.

Collaborative trade and portfolio analytics, in which buy-side and sell-side collaborate in how they assess trades, is likely to be a significant aspect of changing relationships. Investment banks increasingly offer tools that allow clients to assess potential trades based on their own assumptions and market perspectives.

Sometimes these allow the salesperson and client to simultaneously view trading strategies while adjusting trade parameters and discussing the implications, making the client decision-making process highly collaborative.

The step beyond this is assessing the trade specifically within the context of the client’s portfolio, including impact on portfolio-wide risk measures. In some instances these calculations can be done on the bank side, requiring the client’s portfolios to be available on the bank’s systems or at a third-party application service provider (ASP).

If banks cannot clearly demonstrate that they can create superior value for their clients in their interactions, clients will not waste their time speaking with salespeople, and the banks’ key relationships will suffer. This illustration of how relationships are changing in financial markets can also be seen in other client relationships, where banks have a choice between becoming commodities or seeking to create value collaboratively with clients.