In the current economic environment, it seems everyone’s having to do more with less. Does this apply to execution brokers too?
Yes, but we’re not talking about watering down the drinks to make the entertainment budget go further. When institutional investment firms are going into the market less regularly, it’s harder for them to generate the commission levels necessary to command high-quality service levels at a wide range of brokerages. The inevitable consequence is consolidation of counterparty relationships, which means brokers need to ensure they are among the chosen few.
So if corporate hospitality isn’t the route to revenue retention these days, what is?
Execution consulting services is one area that has certainly taken off in recent years. Buy-side trading desks have been inundated with invitations from brokers to meet up for a number-crunching and nibbles party. The idea is that detailed joint analysis of execution performance will help the trader get better results out of the broker’s algorithms. This might arise simply from a clearer understanding of when to use which algorithms and how to optimise their bells and whistles. But increasingly this exercise can also generate requests for customisation to meet the individual needs of a trader or his / her PM. Either way, the collaborative nature of this work can draw the buy-side dealer and the execution broker closer together.
Relationship broking? It all sounds very cosy. Is this free advice an attempt to show the human side of the financial markets?
Not really, it’s good business sense. If there’s less business to go around, you're going to have to work harder to get hold of it. Getting the most out of the tools of the trade often requires a helping hand. Besides, despite all the talk of algos being increasingly commoditised these days, this isn’t the full story. On one the hand, the performance of any individual algorithm tends to be less predictable and more differentiated from other algos in the current low-volume environment. On the other, brokers’ algo suites do have different strengths and weaknesses, which can skew execution results if clients send you too many orders that don’t suit your algos.
I’ve heard of the wrong kind of snow. Is this the wrong kind of flow?
In a manner of speaking. If you have a lot of clients that are looking for consistency of performance in line with benchmarks, you’re likely to put more of your development time into your schedule-based algos. But then you really don’t want clients to send you orders that call for algos with a more aggressive approach, roaming across the trading landscape in search of liquidity. The more of the right kind of orders you can process through an algo the better it can become at achieving the results the client is looking for. But the starting point is education, education, education or consulting, consulting, consulting!