Appliance of science

Technology may play a major role in the transition management process - especially when it comes to interpreting data – but human input remains fundamental to successful outcomes.

The financial services sector continues to invest significant sums on technology. Gartner estimated that banks and investment firms would spend around $620 billion on technology products and services in 2022, applying generative AI in growth areas such as fraud detection, trading prediction, and risk factor modelling.

“While growth is the top priority, the need to manage risk, optimise costs and increase efficiency also requires new technology innovations,” says Moutusi Sau, VP analyst at Gartner. “Generative AI enables bank CIOs to offer technology solutions to the business in pursuit of revenue growth.”

IT spending by banking and investment services firms was forecast to grow by 6.1% in 2022. The largest category of spending is IT services, which includes consulting and managed services and accounts for 42% of total IT spending in the sector. The fastest growing category is software, with spending forecasted to increase by 11.5%.

According to Ashish Patel, EMEA head of transition management at Citi, the greatest advancements to technology at transition management level will continue to be driven by the integration of AI in trading algorithms and risk analytics to deliver greater efficiency and reduction in trading costs.

“AI will continue to dominate capital investment as it industrialises multiple sectors and it seems like we have only scratched the surface of what it can do,” he adds.

Technology will always be a critical part of transition trading and analysis as it is a core component of the process to keep pushing the boundaries to benefit both client and transition manager.

A transition team increasingly needs to have someone who understands what is happening ‘under the bonnet’ when it comes to everevolving technology, analysis and strategies, suggests Stuart Zanchi, senior multi-asset transition manager at Citi.

Human need

“With that in mind, nothing is going to take away from the intrinsic need for human interpretation of data and human design and upkeep of these technologies as well as a trusted relationship,” he says. “This is particularly pertinent on the more complex transitions and as clients engage transition managers earlier in the project development process.”

Paul McGee, head of portfolio solutions EMEA, Macquarie Capital refers to growth in portfolio trade optimisers, and in fixed income more automation in the execution of smaller trades - auto filling of small orders as long as they fall within certain criteria.

“Benchmarking the performance of our technology is not something we do once a year or or every 18 months,” he says. “It is a daily exercise to determine whether these tools are adding value, managing risk, or minimising costs for clients.”

McGee reckons there is no substitute for a trader or traders overlaying the technology.

“We need human interaction and interpretation of trading strategy because transition management is about more than just putting trades down a pipe and pressing a button. We need trading desks who oversee these tools to still have an input in the way that a trade will play out.”

Technology stack

State Street undertakes a lot of large, complex, multi-asset class transactions so has invested in a technology stack. Some of that is proprietary and some is third party vendors providing it with tools to manage data and portfolios, assess risk and cost, and deliver better intelligence.

“Over the last two years we have spent time investing in transaction cost analytics, which enables us to analyse events and explore our universe data more effectively and leverage components of that intelligence and experience to define our execution strategies or provide insights into how we should source liquidity or even access markets,” explains James Woodward, global head of State Street’s transition management business.

The benchmarking process depends whether it is third party or proprietary technology.

In the case of the latter it is a constant process where the company is able to get feedback in terms of what it wants to see in the development pipeline and continually evolve the functionality. Where it is a third party system there will be a selection and due diligence processes at the outset.

“The contracts we have with our vendors will include KPIs and service provisions and as our customers demand new functionality we work with these vendors to continue to build on the existing stack,” says Woodward.

In terms of innovation he refers to developments around new liquidity venues, algorithmic strategies, and technology to interact with that data. But he agrees that it will never completely replace human insight.

“At a general level, technology allows us to operate more efficiently. It enables us to be able to interpret data more effectively but there is always going to be a healthy blend of human oversight – it is hard to automate the entire role of the transition manager.”

Dramatic changes

If we look at pre-trade analysis and the comparison of different execution strategies to help clients make informed decisions there have been some dramatic changes in the way transition managers run their businesses suggests Cyril Vidal, head of portfolio transition solutions, Goldman Sachs.

“Post-trade, from a reporting point of view we gather a lot of data and the way we are processing this data and using it to explain performance is also much improved,” he says. “All of this results in a much better outcome for clients and makes the actual work of the transition manager more efficient andcrucially - more interesting.”

But transition managers also have to be mindful that clients want simplicity and that if they gather too much information (or have too much data and are unable to articulate it and to present it in a simple way to the client) technology can become their enemy.

Looking ahead, there is a big push at Goldman Sachs towards visual structuring (additional features provided through Marquee, the bank’s digital platform for institutional clients).

“There are already some applications for this in foreign exchange and that could expand to other asset class and use cases, providing a better client experience where they can interact with the analysis they see,” says Vidal. “However, none of this will replace the role of the human transition manager to determine from all this data what is relevant.” Systems on the trading side are continually on the largest contributors to risk at that level and combine this with the more macro-focused risk tools at our disposal. evolving, as are the ways in which traders access liquidity. However, as far as transition management is specifically concerned it is the ability to drill down deeper into the contributors to risk that have seen an important step forward.

“We have always seen transition management as first and foremost a risk management exercise,” says Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments. “Historically when assessing the risks in a transition, the focus had typically been on the broader macro risks such as regional deltas, country, sector or currency risk. Now we have the ability to look at contribution to risk at the security level, we can design a trading strategy that looks to focus on the largest contributors to risk at that level and combine this with the more macro-focused risk tools at our disposal.”

As the industry has seen volatility spike at various times over the last few years and expects volatility to be a continuing concern going forward, the ability to bring risk down early in the transition is key to minimising slippage from the mean cost estimate.