Buy-side Perspectives Issue 16 | Page 10

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? 10 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