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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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January 13, 2009

Volatility Ups Sales Trader Demand

By Peter Chapman

High-touch is making a comeback. According to traders and analysts, the buyside is doing less trading by itself and leaving more of its orders with brokerage sales traders.

Until this year, the trend had buyside traders increasingly managing their own orders. Whether it was through algorithms, direct-market-access tools or dark pools, the buyside was eschewing the expertise and information supplied by his sales trader. A low-volatility environment and technological advances gave the buyside the confidence and ability to man the controls itself.

Then things got crazy. With this year's mortgage meltdown, stocks have tumbled and volatility has surged. The VIX, the Chicago Board Options Exchange's closely watched volatility index, has shot from 20 to 80.

Now that stock prices are bouncing around, the proverbial pendulum has swung back. Many buyside traders find they need the color and experience a good sales trader has to offer.

"There has been so much intraday volatility," commented one longtime trader with both sellside and buyside experience. "Everyone wants to know why the market has gone from down 300 points to up 200 in an hour or two."

Today's color is less stock-specific and more about flow information: buys versus sells, what's happening in the various sectors, trading activity in ETFs and options, and whether hedge funds or long-only shops are active.

Industry observers say the reasons for going to sales traders and their "high-touch" services in the current environment are numerous. The need for information to analyze news and rumors is one reason. As stocks move around, portfolio managers need to know why. Another is basic outsourcing: As the buyside desks are stretched, they need to put some of their trades into capable hands during busy times.

And despite all the tools on the buyside, two industry pros at money management firms suggested that some of their brethren are simply afraid to move forward in the self-trading era and take responsibility for their trades during times of volatility. "They don't want to look bad if the trade goes against them," said one buyside trading veteran, "so they give it to a broker."

Another school of thought says that the increased use of brokerage desks stems from the sellside having better traders or better tools, or both.

New research from TABB Group supports the anecdotal evidence. In its annual survey of institutional equity trading, TABB found that "sales traders grew their share of order flow for the first time in several years, capturing 44 percent of total buyside order allocation versus 37 percent of flow last year."

TABB conducted its survey during August and September, interviewing 61 head traders at traditional long-only institutional asset management firms with an aggregate $12.9 trillion in assets under management.

It concluded that in the years before 2008, during less volatile times, the "sales trader's share of order flow was dropping off steadily." In 2007 alone, the sellside experienced a 10 percent drop in business as the buyside sought to contain costs by self-trading through cheaper electronic means.

That has all changed. "In critical circumstances," TABB senior consultant Laurie Berke wrote in her report, "the professional insight and execution expertise of a human trader is suddenly in greater demand. Anxiety levels are high. Information is scarce."

Additional reporting by Michael Scotti

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