US bank Wells Fargo has seen a significant uptake in merit-based broker wheel technology from US buy-side clients in the last year as demand for better execution continues to rise.
Merit-based broker wheel technology assesses and then assigns a level of trade difficulty to a parent order. It then allocates and systematically routes child orders to brokers based on their performance in that difficulty category.
“That trade difficulty assignment is parsed into three basic categories; low, medium and high and either sent to their trading desk or routing wheel technology. These systematic routing wheels balance different trade and broker factors based on their performance across those buckets,” Peter Eliades, head of Wells Fargo’s Wells Algorithmic Trading Solutions (WATS) equities sales and coverage, told The TRADE.
The merit-based systematic routing of orders to brokers that perform well in that category means clients can achieve best execution and potentially go on to gain market share over competitors.
“That’s been one of our differentiated strengths – to listen to clients and customise our approach using our proprietary technology and outperform our peers,” said Eliades.
“Clients have different investment objectives and benchmarks, so at Wells Fargo, we provide customisation solutions to optimise these objectives in order to outperform their benchmarks – whether they focus on arrival price, VWAP or other flow characteristics – our objective in WATS is to help our clients capture alpha.”
The trend has been increasing in the last year as the buy-side continues to strive for the most efficient execution possible. Consolidation, low fee margins, and the ongoing global pandemic have all meant that buy-side firms are under increased pressure to perform well in their execution of orders.
“Systematic routing is being used to drive efficiency for the buy-side trader’s workflow. It frees up the trader by automating more predictable trades and assists them with assigning a trade difficulty that can help them shape and construct a unique execution plan if they were to choose to override the auto-route. It is a systematic approach of course, but the more information you can provide a trader the better the outcome is when balancing impact and liquidity opportunity cost,” said Eliades.
“It also helps the buy-side trader think about how they’re going to create an execution plan. For difficult trades for instance, a trader can manually ‘claim” a routed order back and start to work on an execution strategy that may include capital and high touch engagement, so many times you may need to pull a difficult trade out of a wheel algo and look for an additional liquidity and color.”
Execution has been at the centre of several regulatory and wider market discussions in recent months as competition in the market forces firms to examine how and where they are executing trades.
This attention has sparked several initiatives from sell-side participants looking to meet the new demand, most recently seeing US investment bank JP Morgan expand its data platform for buy-side trading clients last month to include a tool that helps firms evaluate execution costs through a new partnership with TradingHub.