Once upon a time any broker-dealer had two equities trading desks – one low-touch and one high-touch.
And these two trading desks formed the nexus of the trading desk and customer orders. The high-touch desk employed human sales traders who personally handled orders via telephone and provided market color and commentary. The low-touch desk usually saw to it that orders were placed in an algorithm and computer logic handled the executions. The financial and managerial support of these two distinct yet related desks was easy when equity commissions were high. But then came the inevitable and cyclical contraction of commissions and brokers had to cut costs.
Amid this cost cutting was the rise of technology. So, as sales trader jobs went away as a result of cost cutting brokers simultaneously increased their technology spend. Why employ three sales traders when one smart order router could do the same job – without needing raises, benefits or vacations?
But the buy-side wasn’t ready to say goodbye to the people who had long picked up their phone calls, those that assisted them in finding liquidity, personally knew where stocks could be found and in some cases, would just discuss the prior night’s sporting event. Machines were OK for some orders but not all. The buy-side still wanted a human body on the other end of the phone when they called.
So, what’s a broker to do?
Some of the larger bulge firms began to float the “one-touch” concept – a hybrid combination of both low-and high-touch sales traders sitting together on a single desk. This desk, composed of newly minted “execution consultants,” would serve as the single touch point for the buy-side. This would allow brokers to retrain traders in a unified manner and retain their best talent.
Fast forward to now and not many mention “one touch” – after a large culling of the talent pool brokers big and small have again been referring to their sales traders or desks as either low- or high-touch.
So, what happened?
As Richard Johnson, Vice President in Greenwich Associates Market Structure and Technology group recalls it, one-touch was never intended to fully replace the two silo (touch) trading desk. One touch, as he understood it, would be available based on client needs.
“The larger accounts on the street will never choose low-touch as their needs are much more expansive,” Johnson said. “Smaller, less profitable accounts, may be more open to one-touch coverage as they recognize they can’t expect the same level of service.”
But what about now? Is there still room for both the high- and low-touch trading desks?
“Yes, absolutely,” Johnson added. “Coverage models are changing though, driven by shrinking equity commissions which are down by 40% from the peak. In some cases, this means moving towards low touch, and in some cases desks are restructured with program trading and electronic merged, or low-touch reporting under high-touch.”
And if the terms high-, low- and one touch aren’t enough for the market lexicon, how about virtual high-touch? In a recent conversation with Traders Magazine, Liquidnet’s CEO Seth Merrin said the future of equity market trading was in a concept he dubbed virtual-high-touch. The concept was simple – take the best technology available and put it in the hands of high-touch sales traders – freeing up the buy-side trader from the mundane tasks such as paperwork, compliance and reporting and allowing them more time to trade with coverage-provided color.
“What we've been working on for the last, three or four years that came to fruition in the last year and a half, is a whole new class of trading technology. We call it Virtual High Touch and it stems from a bunch of things going on in the marketplace,” Merrin began. “Historically, high-touch traders have advised their customers on how to best utilize their products and source liquidity, but this role has since been marginalized. In fact, all over the world our members have told us that, in many cases, they don't even know who their coverage is at this point. This is unfortunate. We believe that the context a high touch trader provides is a very valuable service that has been provided to our customers, not by us necessarily, but by the larger banks that have the resources and capabilities to do it.”
Merrin continued to explain that Liquidnet’s solution, Virtual HighTouch, gives both portfolio managers and traders more intelligence about how their orders are being handled and executed. With the reduction of high-touch sales traders around Wall Street when compared to a decade ago, the notion of calling up coverage and finding liquidity via telephony has been greatly reduced despite the need for it now.
“Like everything else that we do at Liquidnet, we’ve leveraged technology to create a much better outcome, a much better solution, we believe,” Merrin said. “We've identified the things that are really absolutely necessary and critical for a trader, and there are a couple of things.”
First, he said, is that traders, especially under MiFID II and all the regulations that are going on around the world, have told Liquidnet that they spend 50% of their time searching for liquidity. But the other 50% of that time is wasted on administrative and compliance-related work.
To hear Merrin explain it, Virtual High Touch works by splitting the world into two separate components. One is intelligently sourcing liquidity via either algorithms and or by keeping orders within Liquidnet’s own pool. This helps to minimize leakage and adverse section, he argued. The second facet of VHT is trader intelligence and arming traders with the right tools and technology like Best Ex Replay and other analytics powered by OTAS Technologies.
This article originally appeared in the April 2013 edition of Traders Magazine
One-Touch Is the Future, Exec Says
By Peter Chapman
The institutional equities business is moving to a one-touch coverage model, but the buyside's participation is optional.
That's the message Brian Fagen, Deutsche Bank's head of North American execution services, sent to attendees at last month's TradeTech conference in New York, according to conference-goers.
"You will see more clients moving toward coverage by fewer people rather than more," Fagen said, "but the sellside will not force it on them. That would be a disaster."
Fagen's remarks come as the bulge bracket is starting to offer its clients the option of having a single individual or a group of traders covering both their high-touch and low-touch trading needs (See Cover Story, March 2013). Behind the move is the sellside's need to cut costs, although there are advantages to convergence for the buyside as well.
Still, the trend is a concern for many on the buyside who prefer to keep their electronic orders separate from their block orders. They fret over a loss of the anonymity they enjoy when trading with the bulge's electronic departments.
"I understand the argument that the sellside wants to be able to cover buyside accounts more efficiently," Ryan Larson, the head of U.S. equity trading at RBC Global Asset Management, told attendees. "So you take the cash person and the electronic person and combine them as one. But from our standpoint, I'm not sure I want to give up the anonymity that comes with separate electronic coverage."
Every bulge shop that has spoken with Traders Magazine about the issue has emphasized that their single-touch services are optional. At TradeTech, Fagen echoed those comments.
"We couldn't possibly cover many of our clients with just one person," he said. "Whether it's the anonymity issue or simply the amount of business they do, you have to have multiple people covering them."
Still, Fagen made the point that it would not be irrational to combine the services of the high-touch sales trader with those of the low-touch electronic sales trader. The cash desk already trades electronically, he said. It also offers capital and block crossing services.
"There's no reason why a high-touch sales trader should have any different set of tools, analytics or whatever than an electronic sales trader," he said. "They are essentially doing the same thing."
The problem, the exec noted, is that the electronic trader has a limited set of services he can offer. The high-touch sales trader, by contrast, can offer everything.
Because the buyside is seeking best execution, Fagen said, it would be best to deliver all the services it needs-high- and low-touch and program trading-"in a rational way."
At least one buyside trader is comforted by the fact that agreeing to a single point of contact is optional. "They're giving their clients the option," Larson said. "That's best."