Sales traders on the beat as battle for ideas heats up
Over the past several years
the buy-side has become more independent in its trade executions using direct
market access (DMA), algorithms and other tools provided by the sell-side to
help them capture alpha. Now the relationship pendulum looks to be swinging
back as institutional investors seek better and timelier trading ideas from
Those who provide good
trading ideas will be well rewarded, but how those rewards manifest depends on
local regulation. In some European markets, institutional investors can pay a
percentage of the profits from broker-provided trading ideas, while in other
jurisdictions, such as the US, it might be via a broker vote or increased order
The days of the sell-side
broker pitching trading ideas to institutional clients over steak dinners or
during golf outings is over as more institutional investors want to receive
cash equities trade ideas electronically, says Tim Murphy, general manager,
North America at the TIM Group.
“Using TIM Ideas, the
buy-side is now able to allocate commissions based on the relative value generated
by their brokers’ ideas. This introduces an unprecedented degree of accuracy to
their previously unstructured rewards process,” says Murphy.
Electronic trading idea distribution
platforms, such as TIM Group’s TIM Idea platform, help institutional investors
to manage the flow of ideas from sell-side counterparts while filtering out the
Portfolio managers can
create league-like tables to see which of their contributors on the platform
created the most alpha over a period, according to Murphy. “This levels the
playing field. Portfolio managers can see which ideas are generating the
most alpha for them and attribute them to individual brokers.”
Since the sell-side knows
that the first firm to offer a trading idea will be rewarded more than someone
delivering the same trading idea two days later, many of the largest brokers
have already jumped on the electronic trade-idea distribution bandwagon.
For example, by joining the
750 brokers using TIM Ideas to convey trading ideas to the 250 global buy-side
firms currently accessing the hosted platform, brokers gain a way to manage the
various stages in trade-idea lifecycle and review each stage for potential loss
Applying these new tools
also will change the nature and role of the sell-side sales trader. Rather than
pitching trades to their long-only clients, sales traders will be able to
provide customised trading ideas to a wider varieties of clients, such as
long-short hedge funds and quantitative-trading firms, which are looking for
large sets of trading ideas to feed into their strategies.
The browser-based TIM Ideas
platform also lets brokers tailor their trading ideas for individual clients.
“Sell-side firms are able
to tailor their ideas based specifically on their clients’ investment
styles. For example, if they see a stock that is temporarily mispriced;
for a long term buy-side customer, it might represent an attractive entry point
for building a position in that stock, but for a high volume quantitative fund,
it might represent a short term opportunity,” says Murphy.
With trading ideas stored in
a central location, sales traders can quickly connect clients with the
colleague who originated the trading idea further leveraging the firm's market
In short, sales traders will
become traffic cops directing specific client inquiries to the most informed
brokerage expert while maintaining their relationship with existing clients and
broadening their relationships with new classes of clients.
Just as the sell-side has a
number of ways of sending out its trading ideas, the buy-side has a number of
ways of receiving those ideas, such as a real-time data feed for high-frequency
trading firms looking for a volume of trading ideas to feed directly into their
Murphy says that not all TIM
Idea clients do this, but many who do are outperform the market.
Other buy-side firms use the
platform to see what the brokerage community is thinking. Murphy says some
portfolio managers use the data to examine activity in a particular stock while
others use it to benchmark the performance of their internal research
departments to see if the sell-side caught something their researchers missed.
“One large quant-trading
firm is using the platform to examine market timing to find alpha generating
opportunities in the market,” says Murphy, adding that the firm has statistical
arbitrage funds that use ideas to adjust their trading models.
“Their models are based on
how the market should work from a quantitative point of view, then adjusted
based on ideas. This provides qualitative business intelligence on how
individual stocks should behave. These firms don’t have a lot of broker
relationships, so accessing ideas via TIM Ideas in a format that they can
immediately input into their models works particularly well for them.” he adds.
Although the TIM Group
launched its offering in 2006 and has seen good traction for its cash equities
products over the past three years, Murphy sees the offerings moving “to the
next level” in the coming year or two by adding support for broker-supplied
research and new asset types.
He differentiates trade
ideas from research by their respective life spans. A research note might
provide a target price a year out or longer compared to a trade idea that might
be suggested for only a couple of weeks.
Moving into this space,
Murphy believes that the buy- and sell-sides would be able to correlate
research performance in the same way the platform currently correlates trade
“Within a sell-side firm,
there may be very good analysts covering, for example, the tech sector, whose
research gets picked up and distributed quickly by equity sales people because
the analysts have a proven and reputed track record. However, there might also be some
unfound diamonds in the research department who are not as well-known but have
growing track records. A brokerage firm is leaving commissions on the table by
not sending out these analyst reports fast enough and to the right people”
explains Murphy. “We're looking to close that gap by developing a tool to help
sell-side firms maximise the commission generating power of all analysts.”
When it comes to broadening
the instrument support beyond cash equities, many clients have requested
support for futures in the coming versions.
“If we changed from equities to other
instruments there would be some changes needed in the platform since each
market have their own nuances, but the core architecture is good and we can do
it,” says Murphy.