High Touch in Low Touch: Next Generation Trading

68% of European institutional asset managers place traditional brokerage services such as facilitating block activity as their number one high touch requirement (see exhibit). Yet the reality is that the majority are now routing flow via low touch channels at record levels. The great rotation back into European equities is flying straight into dual economic and regulatory headwinds challenging traditional methods of trading. The inability to trade blocks continues to frustrate; only 36% were able to increase volume of blocks in 2013.

As depleted resources force global investment banks to restrict high-touch trading services to the most profitable clients, buy side and sell side dealing desks are re-adjusting trading behaviours. The industry has long been focused on operational efficiencies and cost-cutting measures, but this is no longer enough. Greater ownership of order flow and the fiduciary responsibility for investor protection is wrestling control from the hands of the global investment banks back into the wider asset management community. This current environment offers a unique opportunity for innovative technology to harness the best of low touch products delivering traditional high touch services in a new format.

As buy-side sell-side collaboration becomes electronic, vial intelligence can now be harnessed. Voice recognition and real-time translation into text can replicate the intimate sales trading relationship across a greater number of clients, facilitating access to key liquidity while minimising risk exposure. As performance becomes ever more reliant on alpha retention, cost controls and improved data flows, only streamlined processes will deliver performance, increasing the demands for more automation through the investment cycle and across all asset classes. By switching the technology focus from execution algorithms to a wider range of workflow processes (position management, hedging strategies and collateral allocation) improved data leverage will deliver better business decisions. The deluge of information requires the ability to efficiently visualise, analyse and respond holistically will require not one technological solution but the amalgamation of many. Only a symbiotic collaboration will enable participants to leverage all resources to optimise liquidity, relationships and resources.

Greater tactical positioning around core portfolios and the ability to react to shifting market dynamics will increase the buy-side dealing desks influence on the implementation of investment strategies. The sell side will also benefit as more effective analysis of risk exposure will ensure traditional brokerage services re-emerge in a new and more cost efficient manner. Through better understanding of individual risk exposure, expensive and inefficient uses of capital can be avoided. From negotiating blocks to more efficient use of collateral, dynamic versus static, the ability to conduct real-time correlations will enable firms to switch from reactive to predictive and proactive analysis, freeing up capital and mitigating risk in the process.

Only a global infrastructure network will enable buy and sell side participants to transact effectively across multiple asset classes throughout the entire trading cycle – pre, at and post-trade – this requires highly integrated systems operating real-time, through multiple channels and devices. However the cost of best of breed technology across multiple geographies and asset classes is unsustainable on a stand-alone basis, leading to increasing number of vendor partnerships, redefining the market participant landscape.

This technological innovation has the ability to redefine access to the control of product and the ability to execute but only the combined collaboration between man and machine, buy side to sell side, will enable traditional brokerage services to emerge in a new and cost efficient manner, delivering the next generation in trading.