On the most fundamental level, buy-side asset managers rely on their sell-side brokers to preserve investment return via buying and selling securities as efficiently as possible.
But trading acumen -- which venues to route to, how aggressively or passively to fill an order, how to find size without signaling intent, etc. -- can no longer be carried out in a black box, or even behind frosted windows. There is a need to know more, know it now, and then know more still.
“When the buy side engages with the sell side. what it needs, and should demand for the benefit of its clients, is visibility,” said Joseph Bacchi, head of multi-asset trading and investment operations at Acadian Asset Management. That entails “clear insight that orders are being handled as instructed and are being executed as intended.”
The ascendance of electronic markets, with their complexities and quantitative (read: less easily explainable) trading methodologies, has underscored the need for transparency. That has run parallel with a broader push for accountability, awareness and information in the wake of the global financial crisis of 2008-2009, a cataclysmic event that some believe was touched off by opacity in pockets of the market.
“If the path is algorithmic, the buy side needs access to real-time execution data and robust venue analysis to help determine information leakage and order viability,” Bacchi told Markets Media. “If the path is traditional, the need is for upfront confirmation on the context on the trade (liquidity and implicit cost impact), and up-to-speed communication on execution progression and consultation services if original instructions are not performing as desired.”
Adapting to the newer world of more low-touch flow, the high-touch channel can become more of a challenge for the sell side, for at least a couple reasons. One, resource-constrained brokers need to do more with less; two, the brokerage model was qualitative and relationship-based for decades and ‘old-school’ traders don’t adapt easily.
Regulation Ahead
One aspect to the evolution is newer or developing regulation such as Markets in Financial Instruments Directive II, which mandates that investment firms take more ownership of their trade executions. Also, there are far fewer human sales traders on ‘bulge bracket’ desks compared with, say, a decade ago.
Relationships are still critically important, but bytes have overtaken beers as a broker’s primary value proposition, and cold, hard analytics rules the day.
“Back in the day, you might have a friendly relationship with a guy from prep school or college, or your sister-in-law's cousin, and that's how you got order flow,” said Kurt Huhner, vice president of business development in the Americas for trading-technology provider Fidessa. “Today the sell side is more of an execution consultancy. The buy side needs color around its order flow. They need more data. They need more information around how their orders are executing.”
Huhner cited transaction cost analysis as an example of the higher bar facing brokers. Whereas the buy side used to be okay with a next-day report that showed how their algorithms performed, now the data needs to be more granular and delivered in real-time or very close to it. Rather than ‘you’re executing 25,000 shares at the VWAP, you’re fine, have a nice day,’ as old-school Sales Trader 1.0 might recap to a client -- Sales Trader 2.0 needs to upgrade their value-add to clients and provide a much deeper dive into market activity, Huhner said.
Transparency, control, and actionable data are key needs of the buy side, said Chris Gwozdz, head of equity products at Fidelity Capital Markets. “Transparency has been an evolution in itself,” he said. “It has moved from wanting to see the data in a report -- maybe a level down from top-level reporting -- to now wanting to really see all layers, and wanting them to be incorporated into trading decisions.”
Buy-side will continue to demand more granular data, and more importantly, will need to be able to leverage the additional transparency to drive analysis and align that analysis with more macro objectives.
Gwozdz cited venue analysis as an example. “Toxicity was probably the first level of transparency,” he said. “But now, people are trying to bridge the gap of how does toxicity tie into a broader objective: how do I integrate that into my algorithms to ultimately enhance performance?”
Either Or
In the age of Sales Trader 2.0, sell-side brokers need to review data such as corporate access, research, social signals, and news, Fidessa’s Huhner said. Importantly, data points need to be curated and scored, so as to minimize ‘noise’ for the information-overloaded buy side. Another must is for trading services and data to be accessible across multiple channels.
From there, brokers need to track their own performance in providing efficiencies for the buy side, spanning low-touch ‘big data’ analytics, to the decidedly high-touch metric of the number of phone calls made and orders received.
Huhner concluded with this message for the sell side: “Upgrade yourself to Sales Trader 2.0, or become an Uber driver!”