Execution consultants need to get a better handle on how their algorithms work in order to secure business, according to buy-sider participants.
A research report by consultancy Woodbine Associates found that three quarters of buy-side firms believe execution consultants are incapable of explaining why their algorithms are different.
The Woodbine report found that many asset managers believe low-touch execution consultants do not have sufficient technical understanding of the algorithms they offer.
When asked if execution consultants can convincingly demonstrate why their algorithmic offering is better than other brokers', 77% said "no", with 23% saying "yes".
The research found that asset managers are looking for clear and succinct explanations of algorithmic offerings, meaning that the sell-side should ensure its execution consultants have a good level of understanding of how their algorithms work in order to convey that to the buy-side.
The Woodbine results show a perceived shortfall in brokers' approach to client service, particularly the practice of placing people directly on a desk with little or no formal training.
Many buy-side respondents told Woodbine they felt execution consultants lacked the knowledge needed to make recommendations. While 46% felt that their execution consultants do understand their alpha-generation and can make recommendations about which algorithm to use, 26% said they could not, while another 28% were neutral.
Woodbine principal and report author, Matt Samelson, said: "While you would think firms would seek out expertise, most respondents were not necessarily looking for a high level of expertise like they would do when it comes to sales-traders. However, where the execution consultant did have a high level of understanding an expertise it was appreciated by the asset manager."
The buy-side also found it difficult to judge the value added to the trading process by execution consultants, with 37% neither agreeing nor disagreeing over the value added. Samelson suggests this may be because the buy-side doesn't want execution consultants to be very hands-on, and expect significantly less input from them than they would from a sales-trader.