Why is broker connectivity important?
Breadth of connectivity has been a key issue for the buy-side and one which sell-side firms are pushing hard in their marketing material. With so many venues available today, institutional investors want to know that their brokers are able to connect them to the widest possible range of buyers and sellers in order to improve their fill rates.
Liquidity fragmentation has become a major issue as market reforms, stemming from regulations such as the Markets in Financial Instruments Directive in Europe and Regulation National Market System in the US, which have made markets more competitive. Where traditionally a stock might only have been traded on a national exchange, today there are likely to be multiple venues and the buy-side is looking to brokers to help them find matches while keeping market impact to a minimum.
Why are algorithmic offerings significant for the buy-side?
Algorithmic trading has become very much the norm across markets as technological developments make trading ever-faster. Day-to-day trading in the modern age is so rapid that no human trader could possibly process the vast flow of data and make trading decisions in micro-seconds. As such, algorithms handle the bulk of trading activity, giving traders more time to focus on more difficult orders.
Algorithms are a key product among brokers and most are constantly refining their offerings to ensure clients are getting the most from them. But, there have also been concerns, with recent problems surrounding rogue algorithms and numerous market blackouts in the past twelve months. As such, buy-side clients are looking to their brokers to provide not only the best algorithmic trading strategies but also ensure their technology is robust, safe and able to cope with the extremes of the market.
How have broker algorithms and connectivity changed in the past year?
The march of technology goes on and both areas have seen marked changes even in the past year. Following Knight Capital’s rogue algorithm in August last year, which lost the firm US$440 million, safety has become a key issue and improving safety and testing of their new algorithms has become a focus for sell-side firms.
However, a trend has emerged recently for larger asset managers to bring algorithmic development and trading in-house. Some firms are now working with brokers or specialist providers to build their own custom algorithms with proprietary front-ends, while the broker provides the connectivity. A desire for increased control among the buy-side and a growing level of sophistication and knowledge means brokers increasingly have to explore new ways to work with their clients to provide the infrastructure they need to develop their own technology.