Hedge funds weighed down by “clunky” trading processes risk further hit from volatility spike
Outdated trading systems and clunky manual processes are hampering hedge funds’ efforts to swiftly execute trade orders to the market, resulting in an annual hit of some USD8 million – which could worsen in the event of renewed volatility later in the year.
New analysis by TradingScreen, a New York-based software-as-a-service trading technology provider, found that hedge funds face hold-ups when processing execution orders as a result of poor system integration and slow manual inputs needed to create, validate, execute and book trades.
By the time traders and portfolio managers have physically entered the information into their systems and sent orders out to market, prices may not be in their favour, the research noted.
TradingScreen found that a typical mid-sized long/short equity hedge fund managing USD5 billion in assets wastes, on average, 2.5 hours per day dealing with 200 orders due to outmoded practices, which is likely leading to around USD8 million in losses every year.
“With prices all over the place, no hedge fund manager wants to be offloading, for example, a large block of FTSE 100 without the required care and attention the order requires,” said Surika Vosloo, European product manager at TradingScreen.
The firm, which provides SaaS services for hedge funds, mutual funds, and brokers, measured an average affected notional daily trading volume of USD150 million.
It suggested a lack of investment into trading systems has often left hedge funds dependent on users manually keying in pre- and post-trade data, with costs ultimately stacking up for managers.
For a hedge fund trading American International Group (AIG) shares, an order size of 2 per cent of the stock’s average daily trading volume could be hit by some 16 basis points due to a 15-minute order delay was 16 basis points – more than five times the average brokerage cost on an order.
“The faster they can analyse the potential market impact, the faster these orders can be sent out to market, and costs savings opportunities can be realised,” Vosloo said.
The study comes as hedge funds continue to evaluate the impact of the mid-March Covid-19 induced volatility on markets, ahead of a potential second wave in the weeks ahead.
Along with a close-run US presidential election looming in November and the growing prospect of a no-deal Brexit in the UK next year, hedge funds are increasingly live to the prospect of further volatility in the coming weeks and months.
Vosloo warned sluggish trading systems potentially risk storing up further trouble ahead of a any renewed volatility spike.
Hedge funds’ technological capabilities have come under increased scrutiny this year, as firms have become more heavily dependent on cloud systems and remote working applications during the coronavirus pandemic.
Vosloo said: “The trouble is, as our findings show, time is quite literally money. With investors currently scrutinising every penny, the last thing any hedge fund manager needs is to be let down by clunky systems struggling to keep pace with a wide variety of order workflows and execution decisions.”