Buy Side, Sell Side Redefine Relationship
The buy side is looking to the sell side for help in navigating a new market structure characterized by lit and dark venues, algorithmic and high-speed trading, complex order types, and fragmentation.
The starting point for the conversations that are taking place is the fact that “at the heart of it, there’s a commercial relationship between the buy side and the sell side, where the buy side wants to obtain products and services that the sell side provides, whether it be research, execution, prime brokerage, or CSA, so there’s clearly a lot of touch points,” Joe Mecane, managing director, electronic equities and credit products at Barclays, told Markets Media.
Mecane, who joined Barclays about four months ago after serving as executive vice president and head of U.S. equities at New York Stock Exchange, said the new dynamics of the buy side-sell side relationship revolve around three issues: sell side consolidation, complexity, and quantitative performance assessments.
“From our standpoint, especially as the industry tends to further consolidate and moves towards further need for scale, the effort has been to try to leverage the entire organization and find ways to deliver value to customers that leverage other parts of the bank, like prime brokerage,” he said. “Broadening that conversation with our accounts across the whole platform is adding a more commercial component to the relationship.”
For banks, this requires a different approach, one that calls for a unified platform rather than an assortment of products and services packaged and sold out of disparate silos. The key question becomes: What types of products or solutions are buy-side clients are looking for that a bank can deliver?
This approach can simplify things for the buy side to the extent it can have a broader or deeper relationship with one firm. “A lot of our efforts at Barclays are directed at leveraging our internal strengths on behalf of our buy-side clients,” said Mecane.
The second issue, complexity, feeds into some of the broader market structure conversations that are taking place. “As has been very well acknowledged and publicized, the world has gotten a lot more complicated,” said Mecane. “It’s difficult to sort through a lot of what’s out there in terms of how different products work, how the market structure conversation is happening, what’s going on from a regulatory standpoint.”
He added. “The sell side needs to continue to build trust, be an information source for the buy side, and be able to educate them on not only where the broader world is going, but on how their own individual products work.”
Most of the public discussions about market structure, such as the proposals that have been advanced by exchanges around payment for order flow and access fees, have been initiated by the sell side and regulators. There has been little research so far into how these discussions reelect buy-side concern.
“The fundamental problem is that there isn’t necessarily agreement, especially across the buy side, about what should be changed and how,” said Mecane. “The proposals appeal to different segments of the population, but nothing universally. Because they’re complicated, it’s difficult to know what the unintended consequences are.”
That’s also why there haven’t been any significant regulatory proposals or initiatives. “There is a need to come up with a framework to measure the impact of the different proposals that are out there, and to take it back to a more data-driven analysis of what’s broken and what needs to get fixed,” Mecane said.
The third issue is quantitative assessment. “My observation is that a lot of the conversations are moving from what also are more qualitative type conversations to more quantitative type conversations,” Mecane said. “There is clearly much more emphasis from the buy side on data and analytics, and more objective measures of performance and quality. Clients are looking to get a detailed understanding of how products work. Having your own process that can analyze how things are behaving, and being able to help people achieve their objectives or best execution – I think that these are all very important capabilities.”
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