[ I N - D E P T H
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T R A D I N G
R O L E S ]
As a new decade begins, Chris Hall looks at how the role of
the buy- and sell-side trader has evolved since the flash crash
of 2010, and finds that while the buy-side has levelled up with
brokers, progression has not always been smooth.
I
t was 2010 when electronic trading first hit
the headlines. Trade automation was hardly
new. Technology-driven innovations had been
accommodated in the US and Europe under Reg NMS
and MiFID respectively. But execution algorithms and
high-frequency trading (HFT) were still a mystery to
senior executives at asset management firms, not to
mention their institutional and retail clients.
This changed on May 6, 2010, when a combination of
factors - speed, structural weaknesses and a looming
European sovereign debt crisis - ignited the ‘flash
crash’, a brief but alarming collapse in US stock prices.
The Dow Jones Industrial Average plunged almost
1,000 points, only to rapidly regain composure, leaving
regulators, traders and investors to wonder: what on
earth just happened?!
First, a poorly parameterised index futures order
from a mid-market fund manager was identified as the
trigger. Later, the finger was pointed at Navinder Singh
Sarao, the ‘hound of Hounslow’, an autistic amateur
trader who played the markets from his bedroom.
Closer to the truth was author and ex-bond salesman
Michael Lewis, whose 2014 expose, ‘Flash Boys’,
suggested the flash crash was an accident waiting
to happen. Exchanges, regulators and brokers had
facilitated a new form of high-speed market-making
and the entry of a new breed of market participant,
allowing revenues to blind them to the systemic risks.
By this point, a cat-and-mouse battle between
traditional buy-siders and HFT firms was in full swing.
Buy-side traders were already treading carefully on
the major stock markets, alert to the potential risks
of interacting with counterparties deploying sub-
millisecond technology to front-run them.
Asset managers looked to alternative trading
venues, including dark pools, but here too they could
encounter danger, especially when venue operators,
typically brokers, were less than transparent about the
identity of other participants.
“Ten years ago, the buy-side probably relied
too heavily on their brokers. But the flood of
questionnaires from plan sponsors
and other clients in light of ‘Flash
Boys’ gave trading desks a mandate
to take more responsibility,
investing in staff and technology
to take control of their order flow,”
says Chris Jackson, global head of
equity strategy at Liquidnet.
Learning curve
Buy-side traders were embarking
on a decade-long learning curve,
gradually deploying faster
technology, better analytics and
more granular data, driven partly
by greater regulatory and investor
scrutiny.
Often dependent on the execution
services of still-conflicted brokers,
they interrogated post-trade
execution performance to identify
more accurately where they could
execute large orders safely, and
where they were under greatest
threat. Sometimes, there was a
balance to be struck, and the risk
was considered worth taking.
Better data and technology have
enabled more effective interaction,
says Gregg Dalley, global head of
trading at Schroders Investment
Management.
“We still don’t have a
consolidated tape, but we have
much better access to quality data,
particularly since MiFID II. When
trading in systematic internalisers
(SIs), we get a lot of granular data
back on our fills which feeds into
our post-trade analysis. HFT firms
are a significant part of the market
Issue 63 // thetradenews.com // 61