Time to reconsider the sales trader – TABB Group
Traditional sales trader expertise offered by sell-side
firms may be on the cusp of a revival in the US, according to Laurie Berke,
principal at financial research firm TABB Group, as buy-side firms increasingly
struggle to find a way to trade safely in blocks.
Based on a survey of 68 head traders at US asset management
firms, TABB discovered that the average percentage of daily trading activity
executed in blocks was 12% in 2011, down from 15% in 2010. But the same traders
reported that they would like to execute 31% of their order flow in blocks – a
level not seen in years. The TABB research also found that that the average
trade size on listed US volumes has been about 297 shares for the past year or
more, while block trades of 10,000 shares or greater have averaged just over 3%
of US consolidated tape volume for the past six months.
Searching for size
“It’s hard to find anyone who will transact in size,” said Berke.
“Institutional investors are increasingly calling for their sell-side trading
partners and buy-side peers to be bold enough to place large orders. At the
same time, it’s becoming clear that electronic trading technologies alone are
not fulfilling that need.”
Recent years have seen the buy-side take increasing control
over its own execution. Using technologies such as algorithms, smart order
routers and direct market access, asset managers have reduced their dependence
on sales trading. But with trading volumes depressed, and market fragmentation
breaking up orders into ever-smaller chunks, buy-side firms are increasingly
frustrated at the lack of opportunity to execute in size.
That frustration has increasingly drawn institutional
investors towards non-displayed venues that promise to aggregate available
liquidity. TABB Group estimates total off-exchange volume, in dark pools and
electronic communications networks and through broker internalisation at 33% of
average daily volume in the US.
Meanwhile, staff cutbacks at many sell-side firms have left
many institutional investors disgruntled that experienced and expert
counterparties are no longer available – leading to a crisis of trust that has
further eroded the confidence of market participants that they can safely trade
in size. The rise of high-frequency trading (HFT) and extensive fears on the
buy-side about the risks of being gamed by aggressive HFT strategies have only
exacerbated the problem, according to Berke.
“Trust is at the
heart of the issue,” she said. “The role of the sales trader has not lost its
place – it is a long-lost art form that can still add significant value. Block
trading is an implementation choice only when there is a trading partnership
founded on discretion and honesty.”
Berke believes that dark pools may only provide half the
solution. The other half consists of a widening opportunity for sell-side firms
to re-energise their sales trading desks, as buy-side firms increasingly come
to realise the value of the discretion and market knowledge they can offer.
“Skilled sell-side sales traders know which clients to call,
which sales traders on the desk to give a nod to and, above all, who is
dangerous and shouldn’t be involved,” she said. “Buy-side traders want to trade
in size – they know that sending lots of small orders is not an efficient