The business of providing ‘low-touch’ equities electronic trading has changed; brokers now need to customize trading strategies to client specifications, rather than just provide trading algorithms and general advice.
Greenwich Associates delved into this trend in its October report “The Evolution of Equities Sell-Side Execution Technology”. The topic was revisited in a Dec. 11 panel discussion hosted by Fidessa.
Richard Johnson, Vice President of Market Structure and Technology at Greenwich, opened the panel with two pressing questions addressed in the report: how is the sell side managing increased demands for customization and increased functionality, and what is the trading desk of the future.
Johnson noted that five years ago, the narrative was that trading algorithms were commoditized. But that’s not the case anymore, as customization requests are increasing -- by next year, nearly half of buy-side shops will be asking for some level of customization, the Greenwich report found.
Enrico Cacciatore, Head of Market Structure and Analytics at Voya, said about 65% of his buy-side desk’s trading is electronic, and that number is trending higher. For a Voya trader to use ‘high-touch’ trading, there must be a justifiable reason, whether that’s facilitation of liquidity, expectations of a match, or tied in with payments for research.
While the standard of today’s sell-side desk is a separation of high-touch and low-touch trading, Cacciatore said the future may look very different. He envisions a ‘pod’ with high-touch and low-touch specialists, plus market-structure specialists, all working together as a team, leveraging their respective skills to service buy-side order flow.
For buy-side traders, Cacciatore said a trading suite developed in-house at a sell-side broker is generally preferable to a white-label algorithmic offering, because the former can be more easily customized. If a buy-side shop needs extensive customization, it needs to be an in-house offering.
Chris Monnery, Global Head of Low Touch Workflows at Fidessa, discussed the challenges presented by legacy technology decisions. “Once having separate technology stacks for high and low touch was seen as optimal, but now it presents a challenge to servicing the client. There’s an increased need for interoperability between the channels,” he said, citing an example of how a buy side may have to amend their order and resend to their high touch just to take advantage of a natural. That's “hardly a seamless workflow’ he added.
Brokers can differentiate themselves in order handling and in provisioning unique liquidity, as well as in customization of trading strategies, Monnery said. “Low touch now has the ability to be more dynamic and systematic throughout the life of the order, not simply a one-time decision on which strategy to target,” he said.
Today’s trading-customization capabilities of the sell side are generally not highly complex, Monnery said. As the sell side improves in its capabilities, buy-side demand for customization and the level of complexity will undoubtedly increase, he said.
Overall, a recurring theme of the panel was that customization of trading strategies is not a finished product, just having a suite of white-label algos on the shelf no longer cuts it in the brokerage business. If a sell-side firm doesn’t have in-house development, having workflow that allow you to present your own customizable solution to the buy side while leveraging the algos in your tool box will be key in providing this layer of service the buy-side is looking for.
To conclude the panel, sell-side brokers in the audience were asked what are their main sticking points in servicing buy-side order flow.
One broker noted a workflow problem, in that while customizing trading strategies can work well, it also can be difficult to implement. Another broker said his desk sometimes finds it difficult to understand the intent of an order; this is especially the case when both high touch and low touch are involved, as opposed to pure quant trading, where expectations for order flow are more explicit.