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December 1, 2001

Ignorance Is Not Bliss: Sellsiders Plead for Understanding

By Sanford Wexler

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  • Ignorance Is Not Bliss: Sellsiders Plead for Understanding
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The buyside does not understand the difficult steps the sellside must sometimes take to find liquidity, according to several sellside traders contacted by Traders Magazine.

Whether or not this is true, some sellsiders say the buyside must hear their case. The target of tough talk by critics of market structure in the U.S., these sellside pros were taken to task by buyside traders in a recent Traders Magazine story. The buyside meted out the usual criticism of the sellside, ranging from a lack of capital commitment to a call for more privacy in the handling of block trade data.

Now the sellside is hitting back: The buyside, it complains, does not comprehend the enormous difficulties dealers must face.

Decimalization is exacerbating market structure problems, especially on the listed marketplace, according to a veteran trader, Barry Small, president and chief executive of Weeden & Co. in Greenwich, Conn. "We [institutional traders] are being disempowered and disengaged from market information," he said. "We are being disconnected from price and quantity discovery."

The biggest problem dealers have had with decimalization is a lack of liquidity in a penny environment, another pro complained. "There are no commissions to be made," according to Jim Whipple, head of capital markets with C.E. Unterberg Towbin in New York. "Decimalization has changed the layout of the land and has made it impossible for us to find the real liquidity."

Decimalization, Small added, has created an environment where both institutional investors and traders are reluctant to place limit orders.

"As we go down to smaller increments," he said, "there is less market information displayed."

One of the biggest problems facing institutional traders, he said, is the lack of protection for limit orders, the "very foundation of the market."

Indeed, Small was blunt: "When you discourage limit orders from coming to the market you are going to wind up with a different market. This market will be more volatile and it will have more velocity."

The buyside complaints are driven by perception, according to one sellside pro. "I think the perception on [the buyside] is that the sellside goes around telling everybody what they have," said Aldo Parcesepe, senior managing director and head of Nasdaq/OTC trading at Bear, Stearns & Co. "But the reality is that the sellside tries to find the other side."

Other sellsiders said decimalization is a secondary issue; that the tension between the buyside and the sellside stems from a misunderstanding of their role.

"The buyside can help by telling us when it doesn't have value-added information," according to Scott Jones, national sales manager for Jefferies & Co, in Chicago. In other words, sellsiders say their buyside colleagues should tell them more of what they hear on market conditions.

"The hardest thing between the buyside and sellside is the education of how things are operating," said Dennis Green, head of OTC trading at Legg Mason Wood Walker in Baltimore.