Execution Consulting: The Next Generation in Electronic Sales Trading

The bar is raised in the electronic trading space. And it’s raised by buy-side traders who have very high-touch expectations from their sell-side electronic trading coverage. Listen to what they are asking for from their low-touch sell-side partners and it’s not your father’s algo desk anymore.

Buy-side traders are sitting in the hot seat. The retail investor has yanked money out of equities for three years running and investment returns have sent baby boomers to the mattresses until the war is over. Portfolio managers at active funds, the life blood of the US equity markets, are under the gun to prove that alpha can be generated, preserved, and delivered on a consistent basis. The steward of that alpha generation is the buy-side trader whose job it is to choose just the right algorithm, just the right participation rate, avoid information leakage and predatory order flow. The risk of choosing poorly is higher today than ever before. Basis points of relative performance can make or break the backs of both the fund and the fund’s trader.

The equity trading landscape is unrecognizable when compared to as few as five years ago. The degree of complexity faced by buy-side traders in choosing an execution strategy has exploded. Today’s spaghetti-mess of a market structure has over 65 trading destinations, hundreds of broker algorithms, thousands of parameter settings across those algorithms, and volatility levels that range from historic norms to astronomic extremes from hour to hour.

The economics of the business are altered forever. Equity commission rates are unbundled and execution alone isn’t worth much today. The percentage of his commission wallet a buy side trader is willing to pay for servers, software and network connections is continuing to implode. Algorithms and smart order routers are now de facto components of a sell-side offering, and most buy-side traders will tell you they’re all but completely undifferentiated.

People, on the other hand, are highly differentiated. Sell-side sales traders are not all proficient, do not all deliver value, and are not all fully qualified to sit in their seats. Their ability to understand and translate the nuances of market structure, the ramifications of regulatory changes, the subtleties of transactions cost analysis and, above all, their trading expertise into positive performance for their clients will increasingly separate the pros from the also-rans.

Execution consulting is the differentiating value proposition in a sell-side trading room today. Buy-side traders don’t hesitate to tell you precisely what they will pay for and why it is value-added to them. In an unbundled world where pennies are scarce, alpha is paramount and service is precious.

The TABB Group Vision Note Execution Consulting: The Next Generation in Electronic Trading is based upon conversations with key players in the US electronic trading space, including heads of sell-side algorithmic trading desks and head traders at major US-based asset management firms. The note covers the evolution of the sell-side electronic trading model as high-touch migrates into the low-touch space. The next generation of electronic sales traders will be partners and advisors to their buy-side clients, providing them with the data, analysis, insight and guidance they need to successfully traverse the maze of complexity they face in today’s trading environment.