Like the mythical phoenix from mythology, Olivetree rose from the ashes of the financial crisis and disorder seen in the post-crisis sell-side.
In the ruins of the financial tumult came many things – mortgage reform, tightening credit and a booming stock market. Amid the growth of brokers back in 2009, Daryn Kutner thought there was a better way to compete in the trading business and that the traditional sell-side model was broken. The ex-Morgan Stanley Managing Director left the bulge firm and started his own firm, Olivetree Financial.
Looking through his own crystal ball, Kutner figured growth and survival in the brokerage business and equities trading would be in combining technology with human sales traders. Taking his own sell-side experience and recognition of the value of technology in enhancing the sell-side’s ability in helping the buy-side generate alpha, he modeled Olivetree Financial and a new brokerage was born in 2009.
Kutner spoke with Traders Magazine’s editor John D’Antona Jr. about the firm’s vision, its operating model and the role of the human sales trader in the age of artificial intelligence and algorithms.
Traders Magazine: How did you come to the view that the traditional sell-side model was broken?
Daryn Kutner: It has never been my view that the sell side was broken per se but the principles of Best Execution operating alongside Asset managers paying for Research via transactions was always a construct I found difficult to come to terms with . Clearly it is/was a conflicted operating model.
The primary principles of MiFID have come along ten years later than we expected but now we are here we expect the ramifications to be more than significant . The simple facts are that sell side cash businesses have operated on pretty poor operating margins even in the best years so with a significant percentage of revenues being reduced from the top line post- MiFID we don’t think many models can sustain.
TM: What technology did you pioneer or advocate to advance the sell-side’s ability in helping the buy-side generate alpha?
Kutner: In 2010 in collaboration with a number of clients we began to develop OTAS. We felt that there was a swathe of observable data available that if we were able to consolidate and analyze could be effective to help our clients navigate through an investment life cycle. Developing OTAS was a challenge but we pursued it because it was entirely consistent with our founding principles - ie we wanted to help our clients in the areas that were not part of their normal USP. We believe most of our clients are very good fundamental stock pickers but often volatility makes them question their investment principles. We wanted to help them understand this better and help them stay focused on what they know best.
TM: How long did it take to advance this technology?
Kutner: We were making advances every day. The reality is that any analytics tool needs and should be advanced on an ongoing basis – it can never stop. Ultimately we decided to sell OTAS once we came to terms with this fact. But actually it was a really liberating point for us as it allowed us to go on the hunt for any comparable/interesting technology that may give different insights
TM: Was there any particular piece of tech that was particularly difficult to integrate or use?
Kutner: Any time you are trying to introduce new technology into investment processes you need to be prepared for the simple challenge of getting mind and time share. It’s difficult to get busy people to open up to new technology on a daily basis until it is fully integrated into their processes …. That takes a long time.
TM: Is there room for more use of technology in the broker model?
Kutner: Absolutely! At Olivetree we are in a constant process of reviewing new technologies to see if there is the potential to extract alpha to the benefit of our clients. After building our own technology we think we are well positioned in this regard.
TM: How does Olivetree balance technology and the human sales trader?
Kutner: I think there is far too much concern about technology forcing human redundancy. We have completely the opposite view - technology has natural limitations. Specifically, it does in terms of creativity and connectivity. We think the value of tech is primarily in the consolidation of data and the implications that this has on our sales people’s time.
TM: Is there such as thing as too much technology?
Kutner: No, absolutely not. The key is understanding what the questions are that you are trying to solve for and implement tech solutions accordingly. We know exactly what we are trying to achieve in our use of technology.
TM: What about the role of the sales trader?
Kutner: We tend to think of sales traders more as consultants/advisors rather than brokers. Of course we want them to trade stocks but we want them to focused on delivering our clients value add from unique sources - to do this they need to be flexible and open-minded.
