The Evolving Views on Client Touch: Cost and Algorithms Transform High- and Low-Touch Desks

Although the buy-side greatly values high-touch coverage, constrained commissions and an increased focus on costs is putting pressure on high-touch desks and transforming how they look like as well as their function in the future. As the buy-side becomes more open to an integrative coverage model, high-touch traders will adopt and embrace more of the low-touch skills and vice versa to produce a trader that is adept in both types of trading.

At the center of this merging of skills are some of the foundational aspects of trading: know the customer’s stocks and trading style and regularly communicate with them. For both high-touch and low-touch coverage, these elements are of most importance. However, if sell-side traders start to have too many accounts to service, these essential skills become harder to deliver. While combining high and low coverage could stem from cost considerations, a sell-side trader with too many buy-side clients will fail on both sides.

On the low-touch side, the consultative low-touch coverage approach is becoming more of an expectation; however, in the end the most important aspect of low-touch is how the actual algo performs. Performance, though, is in the eye of the beholder and, depending on the resources of the buy-side firm, measuring the performance varies greatly. Smaller buy-side firms are more likely to take a qualitative approach to analyze their brokers and algos whereas larger firms will likely have a more formalized, quantitative assessment.

Broker transparency also plays a part with the buy-side’s ability to assess their brokers, and although most buy-side firms are satisfied with the level of transparency they are receiving from their brokers, their next question is what to do with it. Once again, depending on the size of the firm, buy-side firms are creating formal, quantitative processes for evaluating the transparency or informal, more instinctive responses to the disclosures.

In the midst of the high-touch and low-touch evolution, best ex is becoming more quantifiable and the trading landscape is changing. To address these changes, buy-side firms are updating their best execution procedures and adjusting their strategies to look for liquidity.

Cost pressure has put the buy-side and sell-side in similar positions in some ways. Both are examining and quantifying their spending like never before. While the buy-side dives deeper into an analysis of their trades, the sell-side is looking at a more comprehensive analysis of their clients.