Buy-side firms concerned over sales trader knowledge

Over half of asset managers do not agree that sales traders understand their business and how they generate alpha, according to research from US consultancy Woodbine Associates.

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Over half of asset managers do not agree that sales traders understand their business and how they generate alpha, according to research from US consultancy Woodbine Associates.

A survey of 41 US-based buy-side firms found just 45% feel sales traders are knowledgeable about how their business works and can recommend appropriate trading strategies.

Complaints regarding the lack of understanding among sales traders included a lack of commitment to reducing slippage and firms using their own venues and algos as the highest-margin means of execution.

The survey also revealed significant concerns among asset managers that sales traders have compromised execution to satisfy the needs of another counterparty.

While 42% of respondents did not believe their execution has been compromised, a significant minority of 27% think it has, despite often not having any evidence this has happened.

One respondent warned of the potential consequences of this, saying: "It has happened. Though very rarely. I usually cut the broker off completely and for good if something like this happens and they fail to rectify the situation."

However, despite these concerns, most buy-side firms have a high level of confidence in their sales traders, with 63% saying they trust their sales-traders, while just 5% say they do not.

Commenting on the disparity, Matt Samelson, principal at Woodbine Associates and author of the report, said: "If you ask most business people whether they trust the people they are working with, they are generally going to say yes, because they wouldn't be doing business with people they don't trust.

"But the buy-side is fearful of what might be going on that they do not see and there have been notable instances in the recent and distant past that give them cause for concern."

Measuring the performance of sales traders and the value they add is also a point of contention among asset managers, with Woodbine's survey finding that 49% disagree that they can quantify the value added to the execution process, while just 14% believe it can be quantified.

Woodbine says that, while it is possible to measure sales trader performance, the development of ways to quantitatively measure performance is in its infancy and may be more complicated to assess than many buy-side firms have the resources for.

Samelson also cautioned that sales-traders would need to become more focused in the future as "they can't be everything to everyone" and should ensure they remain committed to understanding the business needs of their clients.

The report is the first in a series of three broker coverage reports from Woodbine, with future publications to focus on execution consultants and combining high- and low-touch equity coverage.

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