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July 2, 2013

Liquidity Managers

By Peter Chapman

My colleague John D'Antona and I had lunch last month high above the Midtown Manhattan streets in the executive dining room at one of the bulge shops. Our hosts were lieutenants in the firm's equity trading department. The view was great, the food was delicious, and the conversation was candid. We covered a range of topics, but perhaps the most pertinent was the nature of the buyside-sellside relationship during these slumping times.

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The execs told us they were in daily discussions with their clients over how much service to provide in light of the skinnier wallets. Rationalizing their services is at the top of most brokers' to-do lists, and getting buyside buy-in is important. Our hosts said these conversations were long overdue and were being well received by the buyside as they put both parties on the same page.

To a certain extent, rationalization involves the sellside pushing more trades through their low-touch computers and fewer through their high-touch employees. The buyside is wary about the merging of high with low, but does see merit in the growing movement. A report out this month by Woodbine Associates says as much.

Meanwhile, electronification of order handling by the bulge appears to be providing opportunity for some of the smaller shops to step in with a high-touch offering. BTIG is on a hiring spree, for instance. The U.K.'s Sunrise Brokers is looking to provide a white-glove service to a select clientele (see page 22.) Regionals such as Avondale and JMP Securities are setting up shop in New York.

Despite their concerns over service cutbacks, many on the buyside are still demanding more of their electronic coverage. They fret that their execution consultants aren't as knowledgeable about the inner workings of their algorithms as they should be and they want them to step up their game. That came out in another Woodbine study we cover in a new "Algo Update" feature on the last page. Brokers' order-routing practices come under suspicion in our cover story in which Ariel Investments' Cheryl Cargie voices her dismay over the structure of the marketplace. Cargie is old school and longs for a return to a simpler time. Like many on the buyside, she believes the exchanges and professional traders are in cahoots, making it more costly for her to trade.

That the market is overly complex is not a new complaint, but it is not going away either. Our luncheon hosts said they were very familiar with buyside angst over market structure, but they were doing everything they could to help them navigate the choppy waters. We're not traders anymore, they told us. We're "liquidity managers."

 


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