Sales traders on the beat as battle for ideas heats up

Over the past several years the buy-side has become more independent in its trade executions using direct market access (DMA), algorithms and other tools provided by the sell-side to help them capture alpha. Now the relationship pendulum looks to be swinging back as institutional investors seek better and timelier trading ideas from their brokers.

Those who provide good trading ideas will be well rewarded, but how those rewards manifest depends on local regulation. In some European markets, institutional investors can pay a percentage of the profits from broker-provided trading ideas, while in other jurisdictions, such as the US, it might be via a broker vote or increased order flow.

The days of the sell-side broker pitching trading ideas to institutional clients over steak dinners or during golf outings is over as more institutional investors want to receive cash equities trade ideas electronically, says Tim Murphy, general manager, North America at the TIM Group.

“Using TIM Ideas, the buy-side is now able to allocate commissions based on the relative value generated by their brokers’ ideas. This introduces an unprecedented degree of accuracy to their previously unstructured rewards process,” says Murphy.

Electronic trading idea distribution platforms, such as TIM Group’s TIM Idea platform, help institutional investors to manage the flow of ideas from sell-side counterparts while filtering out the unwanted noise.

Portfolio managers can create league-like tables to see which of their contributors on the platform created the most alpha over a period, according to Murphy. “This levels the playing field. Portfolio managers can see which ideas are generating the most alpha for them and attribute them to individual brokers.”

Brokers step up 

Since the sell-side knows that the first firm to offer a trading idea will be rewarded more than someone delivering the same trading idea two days later, many of the largest brokers have already jumped on the electronic trade-idea distribution bandwagon.

For example, by joining the 750 brokers using TIM Ideas to convey trading ideas to the 250 global buy-side firms currently accessing the hosted platform, brokers gain a way to manage the various stages in trade-idea lifecycle and review each stage for potential loss of alpha.

Applying these new tools also will change the nature and role of the sell-side sales trader. Rather than pitching trades to their long-only clients, sales traders will be able to provide customised trading ideas to a wider varieties of clients, such as long-short hedge funds and quantitative-trading firms, which are looking for large sets of trading ideas to feed into their strategies.

The browser-based TIM Ideas platform also lets brokers tailor their trading ideas for individual clients.

“Sell-side firms are able to tailor their ideas based specifically on their clients’ investment styles. For example, if they see a stock that is temporarily mispriced; for a long term buy-side customer, it might represent an attractive entry point for building a position in that stock, but for a high volume quantitative fund, it might represent a short term opportunity,” says Murphy.

With trading ideas stored in a central location, sales traders can quickly connect clients with the colleague who originated the trading idea further leveraging the firm's market expertise.

In short, sales traders will become traffic cops directing specific client inquiries to the most informed brokerage expert while maintaining their relationship with existing clients and broadening their relationships with new classes of clients.

Just as the sell-side has a number of ways of sending out its trading ideas, the buy-side has a number of ways of receiving those ideas, such as a real-time data feed for high-frequency trading firms looking for a volume of trading ideas to feed directly into their execution systems.

Murphy says that not all TIM Idea clients do this, but many who do are outperform the market.

Other buy-side firms use the platform to see what the brokerage community is thinking. Murphy says some portfolio managers use the data to examine activity in a particular stock while others use it to benchmark the performance of their internal research departments to see if the sell-side caught something their researchers missed.

“One large quant-trading firm is using the platform to examine market timing to find alpha generating opportunities in the market,” says Murphy, adding that the firm has statistical arbitrage funds that use ideas to adjust their trading models. 

“Their models are based on how the market should work from a quantitative point of view, then adjusted based on ideas. This provides qualitative business intelligence on how individual stocks should behave.  These firms don’t have a lot of broker relationships, so accessing ideas via TIM Ideas in a format that they can immediately input into their models works particularly well for them.” he adds.

Moving forward 

Although the TIM Group launched its offering in 2006 and has seen good traction for its cash equities products over the past three years, Murphy sees the offerings moving “to the next level” in the coming year or two by adding support for broker-supplied research and new asset types.

He differentiates trade ideas from research by their respective life spans. A research note might provide a target price a year out or longer compared to a trade idea that might be suggested for only a couple of weeks.

Moving into this space, Murphy believes that the buy- and sell-sides would be able to correlate research performance in the same way the platform currently correlates trade idea performance.

“Within a sell-side firm, there may be very good analysts covering, for example, the tech sector, whose research gets picked up and distributed quickly by equity sales people because the analysts have a proven and reputed track record. However, there might also be some unfound diamonds in the research department who are not as well-known but have growing track records. A brokerage firm is leaving commissions on the table by not sending out these analyst reports fast enough and to the right people” explains Murphy. “We're looking to close that gap by developing a tool to help sell-side firms maximise the commission generating power of all analysts.”

When it comes to broadening the instrument support beyond cash equities, many clients have requested support for futures in the coming versions.

“If we changed from equities to other instruments there would be some changes needed in the platform since each market have their own nuances, but the core architecture is good and we can do it,” says Murphy.

Rob Daly

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