A buy-side desire for greater control and transparency is forcing brokers to re-think their coverage models, delegates at TradeTech Europe 2014 were told in Paris, but questions of trust still have the potential to hamper relationships.
In a panel session on broker service models to institutional clients, Gianluca Minieri, global head of trading, Pioneer Investments, said that large asset management firms were raising their expectations in line with their increasing size.
“By the end of last year, around a dozen asset managers had more than US$1 trillion in assets under management,” he noted. “There is a push from the buy-side to take more control of trading technology and order execution. We expect more transparency. We are pushing and the sell-side is responding,”
Vincent Mooijer, senior equity trader at PGGM, added that a greater awareness of trading costs from both end-clients and portfolio managers was influential in the evolution of trading desk requirements from their brokers. “The buy-side has to be clearer about what we need and the sell-side needs to change its model.”
Mooijer suggested that the traditional brokerage division of execution channels between sales trading, program trading and electronic trading could frustrate the buy-side desk’s search for liquidity. Concerns over information leakage were encouraging institutional investors to break up trades and feed them through low-touch channels, he said, which raised concerns about missing out on latent liquidity only accessible via experienced ‘high-touch’ sales traders.
“I’m looking for ‘mid-touch’ trading: access to the knowledge of the sales trader, without fears over information leakage, but with the ability to use electronic channels too,” said Mooijer.
In response to Mooijer’s assertion that some brokers’ pricing models made it difficult for the buy-side to make optimal execution decisions, Brian Pomraning, head of electronic client solutions, EMEA at JP Morgan, said his firm’s business model supported client flexibility. “It doesn’t matter how you pay, you get access to all the execution channels. This promotes cooperation across the business and allows us to go out with a unified offering,” he said.
Both buy-side panel members confirmed that information leakage concerns undermined trust between institutional investors and brokers. The practice of brokers ‘fishing’ for client block orders by sending out false or misleading indications of interest (IOIs) was singled out as a particular problem by Minieri. “The number of fake IOIs in the market is phenomenal. We have a policy of banning brokers for six months if they send us a fake IOI,” he said.
Pomraning acknowledged that IOIs had become the “junk mail” of the financial markets, but said JP Morgan only generated IOIs from the firm’s central risk book.
Alex Foster, global head of strategy and business development at BT Financial Technology Services said that technological innovation could help to improve communication and trust between the buy-side and the sell-side.
“Video and other collaborative tools are increasingly available on trading consoles. You tend to have greater trust if you can see the whites of each others’ eyes,” she said.