Markets Media recently caught up with Joe Wald, CEO and a Founder at Clearpool Group, to discuss the need for securities brokers to differentiate.
What does differentiation mean for securities brokers? What are the key factors?
Joe Wald, Clearpool
Brokers can differentiate themselves by reinforcing the trust they already have with their clients and utilizing technology, like an Algorithmic Management System, to take it a step further. The keys to differentiation are first and foremost their ability to articulate what steps they’ve taken to create unique value, and then their ability to demonstrate the performance results.
How can brokers achieve differentiation in today's market?
It takes an investment in personnel, technology and time to understand how to fully utilize technology for their clients’ benefit. Ultimately, brokers have excelled in their service models in the past—using technology is just a natural extension of that and gives them tools they can employ to provide a customer-centric solution for each and every client. With regard to best execution, a one-size-fits-all algorithm doesn’t work. Brokers need a service model with people who can utilize technology and work with their clients to create custom algorithms that align with the goals of each of their buy side clients.
Brokers have done a phenomenal job servicing their clients and building trusted relationships, but they've been handicapped by not having the right tools as the market has evolved. Now that the right tools exist, brokers can have the transparency and analytics they need to properly align themselves with the goals of each of their buy-side clients.
How is differentiation today different than it was in the past?
The biggest difference is that today’s differentiation is technologically empowered. In the past, brokers were very capable of talking about what was happening in the overall market and in their specific sectors, from fundamental and news-flow perspectives. But as electronic trading took hold, there was more fragmentation, and the microstructure became more complicated and opaque. They did not have tools with the level of analytics necessary to be able to convey to their clients what was happening with their trades. Being able to provide that level of detail is absolutely necessary for clients to achieve their execution goals given the complex microstructure that we have today.
How are buy-side firms looking for brokers to differentiate their services?
The buy side is looking for more transparency and control from their executing brokers. Ultimately the buy side needs their brokers to be completely transparent and provide them with transparency into what's happening with their orders in the marketplace. Brokers need to provide a level of service to their clients that allows them to adjust algorithms and routing tables on a client-by-client basis in real time. They need to be able to configure and control the ways that their client’s execution protocols work to achieve the results that they're looking for.
What are the rewards of differentiating -- and the costs of not differentiating?
The rewards are clear: continued and enhanced trust in the relationship, and tremendous relevance as a partner. A key point is that the band is really wide between the minimum and the maximum level of service that a broker can provide and the value they can demonstrate to the buy side. So brokers have the opportunity to leverage and embrace technology and to extract the maximum value out of their client relationships, rather than only getting the minimum of their clients’ potential value because they're only paying them what they think they absolutely have to.
The buy side has a limited wallet to pay for services. They are going to pay for the things they value, and they won't pay more than they need to for anything unless they see somebody really go above and beyond and demonstrate true value. Execution quality has become a critical factor in getting people to move their wallet and the tools that exist today give brokers a way to show how they are helping improve that client’s execution quality.
What does the future hold for differentiation in institutional algorithmic trading?
Differentiation comes with the responsibility of taking ownership and empowering yourself by adopting and embracing technology. The winners will be the ones who take ownership and leverage technology to their advantage—the ones who get into the details of microstructure and how they use their knowledge to proactively make recommendations that improve their clients’ trading strategies—and the losers will be the ones who remain stagnant and entrenched in the status quo.
