The price of autonomy

Dealing desks have significantly more power and control over trading than in 2004, but the pursuit of best execution is not yet conducted on a level playing field.

By None

Dealing desks have significantly more power and control over trading than in 2004, but the pursuit of best execution is not yet conducted on a level playing field.

Surely the greater use of technology has got to be the most significant change experienced by the buy-side trader in the last decade?

In the 10 years The TRADE has been chronicling the evolution of equity trading from the perspective of the buy-side dealing desk, the growth of trade automation may be the most high profile trend, but perhaps increased autonomy is the more profound.

New technology is a very physical manifestation of change. As more orders are executed algorithmically (more than 40% of respondents to last year’s The TRADE Algorithmic Trading Survey used algos for 40% or more of their trades by value), the nature and frequency (and intensity) of phone conversations with fund management firms has altered.

Today, a PM will discuss their investment objectives with a trader – over the phone, email, IM or in person – and simultaneously solicit market intelligence to help determine the timing and tactics of the execution. But then his job is done and his opportunity for further involvement is limited. A decade ago, any self-respecting PM would have expected the dealing desk to place the trade using the benchmark, the timing and the broker he dictated. Very probably, the PM would have been in earshot of the subsequent call to the sales trader in question and on sufficiently friendly terms to place the order himself if he saw fit. Technology has enabled a clear separation of duties in the investment process and dealers are now left to their own devices.

Precisely. Technology is the biggest driver of change in buy-side trading. So now you agree with me?

Technology might be the enabler of greater autonomy on the buy-side dealing desk but automating the process can only get you so far. To arrive at the current stage of development, buy-side trading has had to evolve into a discipline in its own right. Over the past decade, dealers have taken ownership of the buy-side trading process, interpreting the requirements of the PMs, choosing the benchmarks and the channels to market based on detailed data analysis, rigorously evaluating the merits of the suppliers of technology and brokerage services. This has required the staff on the dealing desks to understand and tweak the tools put at their disposal and develop a broader perspective on the financial markets eco-system in which they operate than a world view dictated by the ability to beat VWAP.

Around five years ago, a broker said there was a fundamental change in the kind of people being appointed to head the dealing desks at the major London-based investment managers. Out were going the gut-feel, relationship-driven dealers of yore, in were coming the ‘data jockeys’, as he called them: men and women that could analyse execution feedback patterns and use them to systematically improve performance.

OK, so we have a new breed of independent buy-side trader. What are they going to do with this new-found autonomy?

Ultimately, they’re looking to drive a harder bargain for the end-investor. The ability of buy-side traders to use the right mix of inputs to inform trading decisions will grant them parity in the investment process with analysts and portfolio managers, while also holding brokers to account for the results achieved by their algorithms, smart order routers and other execution services. A big worry however may be the price of autonomy. As you point out, technology is a key enabler of autonomy for the dealing desk, but will it be beyond the reach of the mid-tier players, who might end up even more reliant on their brokers.

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