Difficult market conditions since the second half of 2008 have accelerated a trend toward a ‘broad touch’ approach to trading, delegates at the TradeTech securities industry conference were told in Paris last week, as clients demand access both to market intelligence from experienced sales traders and electronic execution tools that can identify liquidity in a low-volume climate.
“The death of the high-touch has been greatly exaggerated,” said Andrew Sharpe, partner, sales trading at UK stockbroker Redburn Partners. “Today’s sales trader is connected to the product, the analysts, the decision makers all the way through the chain, but is also technologically savvy and able to navigate through all the different pools of liquidity.”
“In times of high volatility, clients are looking for guidance on where the markets are headed. They don’t want to look foolish 30 minutes after a trade, so are increasingly using participatory algorithms. But clients still value the input of the sales brokers. Voice brokers won’t go away; the ones that remain will be the best of the best,” said Bill Cronin, managing director, US broker Knight Equity Markets.
The quality of client communication has become much more critical, said Yvonne Hansmann, head of EMEA execution sales, Merrill Lynch, who suggested that the skill-set of the sales trader had changed “fundamentally” in response. “Clients want to know which channel to use in which situation,” she said. “The sales trader must still be able to pick up the phone to find buyers and sellers, but must also know which MTFs to use and when.”
The increased importance of high-touch sales trading expertise was underlined in a recent survey of Redburn clients conducted by Ernst & Young. Redburn’s Sharpe said the heavy losses suffered by many bulge-bracket firms represented an opportunity for firms such as Redburn. “Coverage by global banks is getting significantly thinner. Sales traders that used to manage five accounts are now having to stretch to 15,” he said.
The complexion of the sell-side is undoubtedly undergoing change, said Robert Maher, head of AES sales for EMEA at Credit Suisse, predicting that only a number of sell-side players would be able to make the investment necessary to deliver best-in-class electronic execution services to buy-side clients. “Niche brokers will maintain their relationships via specialist services such as corporate access, but in many cases their execution capabilities will be provided by bulge-bracket firms and technology vendors,” he said.
Knight’s Cronin added that the growth of high-frequency trading, particularly in dark liquidity pools, had created another information need among long-only clients. “The buy-side wants to know in much more detail where their order is going and how it’s being executed. They also want to know when they are interacting with stat-arb flow and whether there is sufficient anti-gaming logic. As the level of counterparty risk increases, the buy-side is more interested not just in which broker-dealers they are trading with but in the participants in any pool that the broker might be routing their order to.”
In a session subtitled ‘How brokers are positioning themselves to meet the market’s needs’, speakers agreed that low trading volumes and challenging market conditions meant that not all providers would survive. “It’s a natural feature of capitalism; consolidation is inevitable,” said Redburn’s Sharpe.
Rather than predicting the likely success of agency-only versus bulge-bracket service models, however, speakers were predicting that they would be connecting to fewer trading venues within the next three years.
“The identity of the winners and losers will depend on where they are taking their models in terms of innovation, speed and service,” said Hansmann of Merrill Lynch.
For Credit Suisse’s Maher, the sudden switch from a bull market with a relatively light regulatory framework had changed the game for multilateral trading facilities. “There are significant headwinds in terms of volumes and the general threat of regulatory change,” he said. “Ultimately, the winners will be the venues with the best product and the best backers from a liquidity provision perspective.”
Read more of our coverage of TradeTech 2009 in The TRADETech Daily in our publications section.