What developments are you seeing in the low touch space?
One is the use of anonymous wheels for venue selection. Customers are particularly keen to show that they are monitoring real time execution quality, venue selection etc. We’re also seeing the concentration of flow with fewer providers. ZebrA-X is creating a hub for trading globally for the bank. We’ll be able to concentrate venue choice, algo choice and a high level of customer service in one location. We’re working with a number of brand new venues and innovators in the market to keep this current. The key for us is to differentiate ourselves from bulge.
When you put technology in the middle of a brokerage offering it tends to accelerate successes and therefore you’d expect the big to get bigger. The more a brokerage business looks like an exchange, the better it does. Much like you’ve seen with internet businesses from 20 years ago, you tend to get the weak ones withering away quite quickly. Due to commission wallets and equity issuance, the market’s extremely competitive so you’re seeing some fallout across different business silos, including electronic and low touch trading.
How are market conditions driving these low touch developments?
A couple of years ago, the goal was to capture retail and reinvent RSP mechanisms. Several banks and brokerages tried to do that. Clients we speak to – in particular wealth managers – are trying to cut costs. They’re doing that by electronifying the smallest 10% of trades. Big clients want to be able to interact or harvest that flow. If on a company’s results day there’s lots of retail sellers, some clients love to build a position by trading against retail because they have better information.
ZebrA-X has one OMS provider called Infront where orders go for three seconds all or nothing. If they don’t execute, those clients’ tickets then go to the RSP of the whole street. In that respect, we’ve disintermediated part of the RSP mechanism. The first bite of ZebrA-X algo goes exclusively to Aquis for 12 microseconds on an all nothing basis so if there’s an institutional order resting there, the retail order can cross at mid or better against that ticket before it goes off and checks all the other venues. Clients can do these kind of trades on a match basis in Aquis Auction on Demand (AOD) and then further down the life cycle of the ticket, a piece will rest firm in Aquis for the life of the ticket which enables us to hand on heart say you cross institutional to retail, retail to retail etc.
The more you electronify the business the more business you do. TCA – traditionally on which execution wheels are built – looks at three things: one is average fill size, two is pre-trade signalling and three is post-trade reversion. Typically, five seconds pre-trade and five seconds post-trade.
How are clients leveraging low touch offerings differently today?
Overarchingly customers want to do block business. They want to finish their tickets by the close of business. There will be some clients who’ll flash our dark aggregator with their tickets for a couple of minutes and then change the order into a benchmark algo. They’ll be some clients who’ll rest the block with us all day long and there will be some clients who rest fractions of tickets and work out where the liquidity is on a particular day, using it as a radar.
One of the key things we’ve done is to connect to systematic internaliser’s (SI) directly. If you can rest benign blocks of stock in certain SIs and get good fill rates you will get extended better liquidity down the road much like reputational scoring seen on Cboe or Turquoise Block Discovery does reputation scoring. There’s a move amongst us and our peers to connect directly to these bilateral SIs because customers want it. Customers’ overarching need is to do the block. They don’t want to miss the print on an exchange where they’re not represented.
We’re building proprietary tools with big xyt. Traditional TCA is T+1 so heads of trading look at execution quality from the day, week, month before. What we are building are live tools that we can drop and drag into the Bloomberg chat and say to the customer look have you thought about doing this with this ticket in order to get this outcome? For us, over the years we’ve seen lots of client chats become quite dormant. On the buy-side, some customers we speak to have hundreds of chats. For us to be relevant in an electronic space we have to have interesting content. If we can drag and drop a picture with what they should do for that particular order based on 20 days of geometric moving averages which big xyt have worked out for us, that’s extremely valuable.
How do you expect the low touch competitive landscape to evolve in the years to come?
Looking at the McLagan survey numbers for EMEA including UK, the low touch wallet has gone from around 30% to just under 40%. Therefore, having an electronic offering at the centre of a broader execution offering is really important. I’d say commissions have bottomed out on the low touch side and so going forward the way to win in the electronic space is really understand your customer. Customers want to see that you’ve got some academic rigour around your processes and your venue selection as well as a good commission rate even though you’re basically offering a high touch service at a low touch commission rate.
The roles of the traditional high touch sales trader and low touch electronic sales trader role are converging and people are talking about where blocks are traded and how they can optimise their outcome on a particular ticket. We’re going to be producing fortnightly research on what’s going on in the dark venue space. Separately we’ve engaged with another three innovation companies BPX Exchange which is waiting for its MTF licence, OptimX and OneChronos.
What developments are you seeing in commissions?
Large, sophisticated buy-side can build their own algo suite and they’re members all the exchanges so in order to make a new connection you have to stand out on several metrics. Two key metrics are venue reach and customer service. In flight analytics and unique wealth management and retail flow are also key. Typically, a big buy-side customer might have five bulge algo connections and then one or two spaces for companies like Investec where we’ve got an angle or differentiation along those lines. Given the high market share of the cash business here – just under 6% of the FTSE 250 – there’s decent resident flow sitting in ZebrA-X along with other wealth management flow which new customers can interact via our mechanisms.
If you rigorously control costs, you can still create profitable business on a standalone basis. Depending on how you negotiate with venues and exchanges is massively important. No one saying that margins are huge anymore but I’ve seen it done where you can run the business profitably on a standalone basis.