Buy-side Perspectives Issue 7 | Page 16

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