Aug 17, 2012
Proving your worth
In the current economic environment, it
seems everyone’s having to do more with less. Does this apply to execution
brokers too?
Yes, but we’re not talking about watering
down the drinks to make the entertainment budget go further. When institutional
investment firms are going into the market less regularly, it’s harder for them
to generate the commission levels necessary to command high-quality service
levels at a wide range of brokerages. The inevitable consequence is consolidation
of counterparty relationships, which means brokers need to ensure they are
among the chosen few.
So if corporate hospitality isn’t the route
to revenue retention these days, what is?
Execution consulting services is one area
that has certainly taken off in recent years. Buy-side trading desks have been
inundated with invitations from brokers to meet up for a number-crunching and
nibbles party. The idea is that detailed joint analysis of execution
performance will help the trader get better results out of the broker’s
algorithms. This might arise simply from a clearer understanding of when to use
which algorithms and how to optimise their bells and whistles. But increasingly
this exercise can also generate requests for customisation to meet the
individual needs of a trader or his / her PM. Either way, the collaborative
nature of this work can draw the buy-side dealer and the execution broker
closer together.
Relationship broking? It all sounds very
cosy. Is this free advice an attempt to show the human side of the financial
markets?
Not really, it’s good business sense. If
there’s less business to go around, you're going to have to work harder to get
hold of it. Getting the most out of the tools of the trade often requires a
helping hand. Besides, despite all the talk of algos being increasingly
commoditised these days, this isn’t the full story. On one the hand, the
performance of any individual algorithm tends to be less predictable and more
differentiated from other algos in the current low-volume environment. On the
other, brokers’ algo suites do have different strengths and weaknesses, which
can skew execution results if clients send you too many orders that don’t suit
your algos.
I’ve heard of the wrong kind of snow. Is
this the wrong kind of flow?
In a manner of speaking. If you have a lot
of clients that are looking for consistency of performance in line with
benchmarks, you’re likely to put more of your development time into your
schedule-based algos. But then you really don’t want clients to send you orders
that call for algos with a more aggressive approach, roaming across the trading
landscape in search of liquidity. The more of the right kind of orders you can
process through an algo the better it can become at achieving the results the
client is looking for. But the starting point is education, education,
education or consulting, consulting, consulting!
Chris Hall
+44 (0)20 7397 3819
chris.hall@thetrade.ltd.uk