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December 1, 2011

Low-Touch Trading Gets Personal

Low-Touch Trading Gets Personal

By By James Armstrong

As high-touch trades continue to decline and trading algos get more and more complicated, buyside firms are turning to the sellside for execution consulting that combines high-touch service with low-touch technology.

That's according to a new report by Tabb Group, which found that by 2013 the way the sellside services clients will look radically different from today. Traders will seek out value-added insight from their electronic trading partners to help them traverse an ever-shifting maze of decisions, Tabb predicts.

The report, "Execution Consulting: The Next Generation in Sales Trading," envisions a new model for sales trading that requires refined skill sets to help buyside traders navigate market structure.

Tabb interviewed the heads of sellside algo desks as well as head traders at major asset management firms and found that there is an increasing demand for the high-touch equivalent of insight and advice, but from the sellside's low-touch algo coverage.

While today there is a distinct difference between a sales trader who has an opinion on a stock and an algo desk coverage person who can explain a change in a liquidity-seeking strategy, the future will see more of a hybrid approach, the report found.

"You will find that there are folks that have been high-touch sales traders who are now on sellside algorithmic trading desks," said Laurie Berke, a principal at Tabb Group and study author.

Sitting next to that former high-touch trader might be a quantitative analyst with very different skills, Berke said. To offer execution consulting services, firms need to blend their two different approaches.

Berke notes three skill sets the buyside is demanding. The first is the ability to know and understand customers' needs, a page out of the traditional sales trader playbook. Second is expertise in a firm's own algos and trading technology. Third is a deep knowledge of market structure.

"The bar is raised now for low-touch coverage," Berke said. "They need this unique blend of skill sets."

What really differentiates one broker from another is an ability to apply trading tools specifically to the needs of an individual customer, Berke said. The way to optimally use an algo is very different for a large-cap value manager than it is for a small-cap growth manager, she noted.

"You've got to understand what's driving the buyside client's transaction," she said. "What's the objective of the trade?"

Execution consultants will be able to demonstrate their value if they can help clients preserve and protect alpha, something that will show up in TCA numbers, she said.

Execution advisors could largely replace traditional sales traders, but the report predicts there will be fewer of them in the trading room.

Berke said once execution consultants can prove they save money, they will be able to justify their fees.

"You're going to be able to quantify it, and the buyside will pay for it," she said.

Mark Kuzminskas, director of equity trading for Robeco Investment Management, told Traders Magazine he would be willing to pay for execution consulting if it could be shown to add value.

Kuzminskas said he has seen the sellside beef up their low-touch areas, adding more contact individuals to provide updates, performance metrics and trend spotting.

"As differentiation amongst algos and the various offerings becomes harder and harder to discern, I think that's led to the sellside placing more emphasis on distinguishing the value add from one to the next," Kuzminskas said.