If imitation truly is the sincerest form of flattery, then it appears the buy side is Wall Street’s secret admirer.

Deutsche Asset & Wealth Management epitomizes buy-side empowerment, having created a trading ecosystem that encompasses automated trading, algorithms, smart-order routing, and even its own sales traders.

“Essentially what we’re trying to do is build a sell-side operation within a buy-side infrastructure,” said Mike Bellaro, global head of equities and listed derivatives at Deutsche AWM, which has $1.2 trillion in assets under management. “From our perspective, that means really taking control over the execution process very completely.”

It also means moving trading closer to the portfolio construction and implementation process, “because we really needed to be closer to our key stakeholders,” Frankfurt-based Bellaro told Markets Media. “We have to understand what they’re thinking and why.”

Bellaro arrived in Germany four years ago, after running the trading desk for Deutsche AWM in the Americas. Before that he was head of international trading and a partner at Scudder, Stevens & Clark.

Bellaro’s main objective was to build a best-in-class trading platform, which required changing the entire infrastructure. At that time, most of the European buy-side community was essentially outsourcing much of its operations to the sell side. “It was very typical across the Continent four years ago for most buy-side firms to give complete control over the execution process to the broker,” said Bellaro.

One of the first things that Bellaro did was take back control over the execution process. “The way we went about that was actually by significantly embracing electronic trading,” he said. “When I got here, less than 1% of all of our trading was done electronically and when I say electronically that means through use of broker algorithms, ‘smart’ order routing where there’s no human intervention, and through program trading.

Today, 80% of Deutsche AWM’s equity trading is done through electronic trading. “We used electronic trading to empower the buy-side trading desk,” Bellaro said. “The reason that I put a major emphasis on electronic trading was that it requires you to have a trading thesis on the market sector and stock that you’re trading, and you need to understand what the fund manager’s objective is.”

Under a technology initiative with Portware for equities listed derivatives, Deustche AWM is “bringing to life next generation smart order routing so we can actually start to do things even more intelligently than we’re doing them today,” Bellaro said.

This includes automation of the broker-selection process. “We think this is an area where hopefully we have an industry leading role, which is trying to use a multi-factor approach to automate why a trader should consider using a particular broker for best execution,” said Bellaro. “We truly believe that that will help optimize results for us during 2015.”

Another goal was to build a sales trading culture within the trading desk. The buy-side trading should consist of both “pure” trading and the sales trading side that traditionally resided on the sell side. “Our traders need to be able to be even more knowledgeable today than some of our sell-side sales traders,” said Bellaro.

Sales trader functions include providing market intelligence, idea generation, strategic liquidity opportunities, alternative investment solutions, implementation advice, and executions consultancy to the fund management teams. “A lot of the emphasis was spent on helping our traders become students of the markets, and essentially taking over a lot of the day-to-day sales trading load that historically resided on the sell side,” said Bellaro.

Large buy-side institutions such as Deutsche AWM haven’t ramped up their trading capabilities by machine alone.

There has been some “brain drain” in recent years in the form of migration of talent from the sell side to the buy side, according to Matthew Rowley, chief technology officer at New York-based agency broker WallachBeth. “I think this ‘rise of the quants’ will continue.”

The change has been apparent for several years now. “Initially the buy side was turning to their own quant guys, who mostly constructed portfolios, to do a bit of everything, even execution,“ Rowley said. “But the world of the execution quant was built up mainly on the sell side, with teams of guys who built algorithms and such.”

He continued, “With the way markets have gone, some of those guys found themselves looking for new positions at the same time the buy side realized they need more control and they didn’t know enough about how to build their own algorithms. The only way to really control was to hire some of these guys.”

Featured image via vitstudio/Dollar Photo Club