Planning for the future:
DIALOGUE WITH CITIGROUP
In issue 6 of The Buy-Side Perspectives, Citigroup posed a number of questions to
the buy-side traders. Below, we publish a response to these questions, based on
feedback we have collected from the buy side.
Buy-side response to question: How far can EMS smart
order routing develop to minimise manual intervention
in execution?
K&K Global Consulting (K&KGC) reports that leading innovative buyside firms already record, analyse and categorise their own order flow
and trading behaviour in order to a) find commoditised approaches
which can be automated and b) identify exceptions that require
manual intervention. This means some trading desks have employed
a more technical profile of "low touch" traders who continuously are
working on automating and streamlining processes to minimise the
need for manual intervention. The first and most obvious step is
that the buy side wants to avoid manual intervention with a
large amount of small orders which else would be time
consuming and are less sensitive to market impact.
and reducing the total number of trading headcount in 2016.
In addition to the trader, the PMs need to change behaviour and
the firm needs to implement a process where it is compulsory for
the PM to provide clear order instructions without any default value.
Compulsory detailed PM order instructions may anyway be required
within the framework of some firms' future allocation
of research commissions.
Some buy-side traders already debate
if such low-touch development in the
future also could span across asset
classes when foreign exchange and
fixed income are catching up with the
automation in equities.
“We won’t organise the trading
desk by asset class. Instead will
have a high-touch team and a
low-touch team. The low-touch team is
in liquid names and small trades with very little market
impact. It will be fully automated and individual traders
will cover all asset classes. At the same time the hightouch desk will be for very sensitive trades, decent
size notionals and less liquid assets.” Union Investment
estimates that it can automate 20-30% of its number
of orders across the whole business.” Christoph Hock,
head of multi-asset trading, Union Investment, “Breaking
barriers”, The Buy-side Perspectives, issue 5
“My goal is to create a scalable platform.
If I triple my firm’s AUM, I should be able to
do it without increasing the headcount.
Automation is the key. ” Last year, 85% of
Deutsche Asset Management’s flow was
executed electronically – much of it through
customised broker algorithms with no human
intervention.” Mike Bellaro, global head of equities
and listed derivatives, Deutsche Asset Management,
“Radical automation and buy-side empowerment”,
The Buy-side Perspectives, issue 3
Some buy side argue that algorithms have the capacity to
outperform the human trader in such scenarios. In the ideal world,
the High Touch trader will only focus on trading exceptions, within
their specialisation, where human complex reasoning is required. In
practice, K&KGC has found that many trading desks are consolidating
16
In a near "perfect" electronified market with standardised protocols
such as Fix, and a high level of transparency and fragmentation due
to algorithmic trading, such as the USA, there is the potential for
relatively higher levels of automation. However, in Asia, where there
is a much higher level of dependency on personal relationships
www.buysideintel.com
December 2016