‘Color’ in an Electronic Market
In a complex electronic marketplace, buy side — sell side communication ain’t what it used to be.
The evolution of electronic markets depersonalized, to an extent, the relationship between investment managers and the brokers who buy and sell on their behalf. More recently, the fragmentation and increased complexity of the market have siloed the two sides further.
Providers of trading technology have taken note of the information gap.
“As trading decisions get made, there should be real-time conversations between the buy side and the sell-side trader who is watching their trading flow,” said Joe Wald, chief executive officer of Clearpool Group. “You want there to be actionable insight so that you can not only see it, but you can do something about it. Control and transparency is built-in.”
The buy side clearly wants more from the sell side — in a Greenwich Associates survey conducted earlier this year, just 7% of investment managers said they were happy with the standard algos provided by their brokers. Managers are increasingly looking to customize algos and risk controls, as well as manage access to venues when executing. All of that requires more granular information than is currently provided.
“While information transparency provided by the sell side to the buy side has increased in recent years, generally the information is on an ad hoc basis,” said Chris Nagy, chief executive officer at market-structure consultancy KOR Group and a 30-year Wall Street veteran. “Even then, the information usually does not allow for a complete analysis of algo/venue combinations, or comparative analysis across brokers.”
Greater transparency can help traders reduce implementation shortfall — the difference between the decision price and the execution price — and improve trading performance. “In the absence of effective information, it’s not uncommon to see slippage occurring in double-digit basis points,” Nagy said.
Information for buy-side traders is generally provided after the fact, and in a format that needs some massaging to uncover the underlying value.
“Historically, there really has been no insight into the micro aspects of what goes on in the marketplace,” Wald said. “People would only see broad-based, past-dated Transaction Cost Analysis on a spreadsheet, showing what had happened versus old market data. There was no real-time insight on what’s happening from a micro-structure perspective.”
New York-based Clearpool has enhanced its client portal in a way that company executives say changes the dynamic. The new dashboard embeds a series of collaborative real-time trading tools that are meant to raise the bar on dialogue between the buy side and the sell side, and improve the quantity and quality of the ‘color’ that brokers provide to clients.
The product is a bit of a paradox in that it is a new technology, but its value-add is that it turns back the clock by ‘repersonalizing’ the buy side — sell side relationship.
Wald noted that the data visualizations presented on the portal can quickly and intuitively show whether a trader is being too passive or too aggressive, or if there’s an issue with a certain venue, or if the market overall is doing something unexpected. “It’s about having data that you can use, and helping the buy side understand the footprint of their order,” Wald said.
“It’s actionable insight, which is a better reason for a broker to pick up a phone,” Wald said. “This is the more fruitful conversation that the buy side has been demanding, and it’s the conversation the sell side wants to give but hasn’t had the tools to do so.”
MKM Partners focuses on high-touch and low-touch trading of equities and options. “Our goal is to remain an extension of our clients’ trading desks,” said Matt Casamassima, head of trading at the Stamford, Connecticut-based institutional equity, research, sales, and trading firm. “In today’s complex trading environment, we find the more information and dialogue the better when meeting our clients’ trading objectives.”
Having the right technology in place enables MKM to provide “a low-touch solution managed by high-touch traders,” Casamassima said.
In a nod to the information needs of the buy side, the U.S. Securities and Exchange Commission last year proposed rules that for the first time would require broker-dealers to disclose the handling of institutional orders to customers. “While (Rules 605 and 606) have predominantly been aimed at the retail audience, the revised proposals expand the rules with trading information for the buy side,” KOR’s Nagy said. “The new rules could be finalized as early as this year.”
Experts caution the buy side about unrealistic expectations.
How can securities brokers differentiate?
New MarketAxess COO says market development is at an early stage.
Tailoring equity-trading strategies to client specifications is a work in progress.
Cantor Fitzgerald cites execution quality, customization, and access to liquidity as trading differentiators.