(This is the third of a three-part article series sponsored by Bloomberg. The first two articles were Sell Side Steps up Automation and Sell-Side Automation: Not One-Size-Fits-All.)

The sell side is increasingly looking to automation for help in unlocking value from data.

The availability of, and access to, extensive, reliable data is critical for sell-side trading desks, and it will become more critical. Commercial vendors have raised the bar on data quality, and proprietary data is increasingly seen as a valuable resource. There is a huge amount of information generated through counterparty queries and interactions, which firms are becoming more adept at, capturing and leveraging as the basis for deeper automation.

Trading-desk professionals say harnessing data establishes a feedback loop, for example when there is an auto-response to an RFQ. Each time that automated task occurs, more data is captured, making the machine ‘smarter’ the next time around and setting the stage for more automation.

Access to data in the cloud can serve as an enabler of technology adoption as firms experiment with new ways to automate. Cloud-based environments make it easier for developers to quickly prototype front-office apps that take advantage of emerging machine learning and AI capabilities.

The heavy emphasis on data has shifted the optimal skill set for a sell-side trader to be much more quantitative, with data analytics and coding among prized backgrounds. For a sell-side brokerage firm, this mindset extends to an organizational level.

“We’re at an inflection point where managers need to understand and apply technology prudently throughout the firm,” said Stephanie Sparvero, Global Head of BVAL (Evaluated Pricing) at Bloomberg. “What is your strategy for automation? Where does automation make sense, and where does it not make sense? What are you able to successfully automate?  Definitely, having more technology- and data-driven leaders at the top will differentiate performance over the long run.

The rise of automation has been a long-term trend– and that rise has accelerated this year as the COVID-19 global pandemic forced financial firms to operate mostly remotely since March.

For institutional sales and trading desks, collaboration and information sharing suffers as data dissemination is slow or nonexistent. Customer service can deteriorate due to less effective and timely communication, which can result in missed trading opportunities and even longer-term damage to customer relationships.

Sell-side brokers leading on automation are best situated for high-volume, high-volatility markets — not necessarily because of the automation per se, but because the automation chops wood that the trader then doesn’t have to, enabling the sales trader to provide more personalized service to clients when they may need it most.

Going forward, sell-side firms will continue to increase automation over time, both by increasing the order flow being automated, and expanding into more bespoke asset classes. The primary motivation is top-line growth, rather than cost reduction.

According to Celent research, 73% of capital markets participants expect that increasing revenue will be the business focus of the trading desk over the next three years, while 27% expect the focus to be cost cuts. That would be a departure from the past three years, when 68% cited cost cutting as the focus.

Goldman Sachs has been investing to develop next-generation electronic trading platforms in FICC and equities. On an October 2019 conference call to discuss third-quarter earnings, Goldman Sachs CEO David Solomon said: “These investments draw on our returns in the short-term, but are critical to expanding our capabilities and our competitive position.”

Automation on the sell side is the next step in a long-term technological evolution. Automation is about capturing efficiencies, but more than that it is about redeploying human capital to higher-touch tickets.

Learn more about changing trends in sell-side trading in our new report Transform your trading in turbulent times