Eric at the 14 th ATF Equities Paris
We want to leverage the full value of
senior traders for alpha generation
in the portfolio management. The
‘alpha trader’ concept is a continuously
growing theme within the buy side as
we are facing increasing complexity to
find liquidity with the fragmentation
and we need to deliver smarter answers
about the market developments
in the short term. To deliver these
smarter answers we continuously
need to optimise our technologies. It
is an interesting job. Some PMs use
this smart content more than others
depending on the portfolio strategy.
The PMs may sometimes have a
different view but our intelligence is
another tool within their toolbox and
it is important for the trading desk to
add value outside of just execution
and best execution. When the PMs
have gained confidence that you have
a smart understanding of the market
and liquidity sourcing, they give you
more flexibility and discretion as they
understand that you are doing your
best for them.
This is in my view of how buy-side
trading desks should evolve. It
would be a shame not to leverage
the intelligence we have on the desk
internally.
How do you perceive the brokers are
differentiating with their high touch
services, if at all, now 17 months after
the implementation of MiFID II? What
is the role of high touch trading in
the increasingly electronic market
with higher levels of automation and
crossing solutions for both equities
and fixed income bonds?
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Starting with equities, the evolution
of high touch sales trading is a key
question as, the last two years, all the
buy side onboarded their algo suites
and most of our flow is now traded
using algos. With our new technology
on the front end, we no longer have
the same need for high touch liquidity
seeking services compared to the
past. Therefore, it is a challenge for
the high touch desk to maintain their
relationships and stay ahead of their
clients with smart advice as they receive
less flow than previously. Mid-touch
could be one solution for the sell side
where they can leverage the algo flow
from their counterparties and the buy
side can ‘click’ the GUI to empower the
high touch desk. This is an interesting
solution optimising the capabilities
with old-school high touch trading with
the latest algo trading. The sell side high
touch trader knows their clients and can
now advise about how to use the algo
suite. The big question is to what extent
the buy side will be willing to disclose
their algo flows to the high touch desk
to offer them the opportunity to source
incremental liquidity. The role of the
high touch trader is converging into
a hybrid role between a CRM (client
relationship manager) advisor, as
they know the needs of the client and
liquidity sourcing by risk facilitation or
natural liquidity through their client
network. The sell side high touch
trader can provide value to their clients
with advice on market structure,
regulatory changes and to be an entry
point as a relationship manager for
counterparties. I also see the possibility
for the sell side to add value to the buy
side with more general consultancy,
outside of day-to-day trading, as we
www.buysideintel.com
have less interaction with their people
due to the high level of algo trading. It
is crucial for the sell side to maintain the
understanding of their clients in terms
of evolution, positioning, risk request
etc. I think the high touch desks could
also play a bigger role in the allocation
of risk to their counterparties. They
could be in charge of risk allocation
helping to allocate balance sheet for
their client’s specific challenges.
Referring to findings from recent Alpha
Trader Forum debates, I can see how
some of my buy-side peers would
potentially perceive high touch desks
operating as some type of “light ECN”
creating mega block opportunities as
part of their liquidity sourcing activities.
The high touch desk would need advice
on how to optimally execute such block
trades under the current regulatory
regime where BCNs are no longer
permitted.
The evolution of high touch in fixed
income is different to equities and
more challenging as in the past the
sell side high touch trader was a
hybrid role between PM and trading
desk coverage. Post MiFID II, I saw
counterparties started to focus more
on the flow than the PM coverage and
that was a mistake. If the counterparty
does not have PM coverage, it will
impair their opportunities to receive
the flow as PM coverage is feeding
the idea generation that is the basis
for every order. We have spent a lot of
time explaining to our counterparties
that the PM coverage must be
maintained with a high level of service.
Some counterparties have therefore
leveraged the same type of setup as
within equities, with some sales traders
providing a service to the trading desk
and separate sales trader for PMs. It’s
important that the coverage evolves
within the sell side with more people
dedicated to trading topics and at the
same time have a sales team working
closely with the PMs We need to repair
these unintended consequences of
MiFID II. The technology innovation
Summer 2019