Traditional prime brokerage heavyweights and new entrants alike will find an increasingly diverse client base wants increasingly sophisticated-and customized-technology. Or so say consultants Celent in a review of prime brokerage technology.
Celent also finds that prime brokers’ main technology initiatives over the coming 12-18 months will focus on risk analytics, followed by algorithmic and programme trading tools, reporting, and providing clients with web-based access to account information and trading applications.
“The next several years will see a rapid increase in technology development within the prime brokerage community, as firms stake their claim in this lucrative business,” says Harrell Smith, manager of the Institutional Securities & Investments group at Celent and author of the report. “While broker-dealers continue to rely on internal staff for key development initiatives, the trend toward outsourcing for both pre-packaged solutions and customized support and development continues.”
The conclusions are based on a survey of 12 leading prime brokers in a market Celent describes as “fast growing and lucrative.” The firm says the hedge fund industry continues to grow at a staggering pace. Hedge funds remain extremely popular investment vehicles despite recent depressed returns and increased regulatory oversight, which threatens to partially lift the veil of secrecy that envelops the industry, says Celent.
For sell-side firms, prime brokerage is the central component of the drive for higher-margin client services. Although traditional buy-side clients have been squeezing sell-side margins by negotiating more favorable commission structures, hedge funds are willing to pay higher trading commissions for both bundled services and execution.
In the 2006 Global Prime Brokerage Technology Survey, Celent provides an in-depth analysis of broker-dealer spending trends and development initiatives. According to the report, custom user requirements remain the primary challenge for firms wishing to serve the hedge fund community.
While firms that have traditionally dominated the prime brokerage league tables continue to reap most of the spoils, the market is becoming increasingly crowded. Celent estimates that between 2000 and 2004, the top 10 prime brokers captured almost 80% of available hedge fund-related prime brokerage fees. As firms aggressively push into the market, investing heavily in technology and consulting services to service the growing crop of hedge funds, entrants will secure a bigger slice of the revenue pie.