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August 1, 2013

Come Together

Buyside Wants High- and Low-Touch Desks Executing Trades Jointly

By John D'Antona Jr.

The buyside wants its brokers to integrate their high- and low-touch traders into a unified coverage team.

That's what institutional traders have requested, consultancy Woodbine Associates said in a new report released late in June, "Broker Equity Coverage: Align or Combine."

Eighty-five percent of asset managers surveyed indicated they value "aligned or combined" execution services, according to the report. Such a configuration was "optimal" because "interaction of [high-touch and low-touch] liquidity and work flow can be beneficial," the report said.

"The buyside clearly wants it," Matt Samelson, principal and author of the report, said of a unified trading approach. "Given the number of pressures the buyside faces, such as quality of service and commission spend, a more combined desk approach with shared or tiered responsibilities within the brokers could be the answer. The buyside doesn't necessarily want to think about execution services as high- and low-touch anymore." 

David Jennings, Bridgeway Capital

Buyside traders who spoke with Traders Magazine generally agreed with the report's findings, but warned that brokers must proceed with any integration with caution.

David Jennings, senior trader at Houston-based Bridgeway Capital, said his firm was seeing an increase in the number of brokers employing a unified trading approach.

"We're seeing more and more of this kind of integrated approach, I suspect due to declining margins across many aspects of the brokerage business," Jennings said. "I don't think there is anything wrong with high- and low-touch guys working more closely together in some cases."

The report arrives as the larger brokerages are taking steps to break down the walls that have historically separated the two desks. This has come amid the backdrop of declining equity market trading volumes, a shrinking commission pool and a growing need to maximize trading efficiencies on the sellside. The buyside, aware of the sellside's need to streamline itself, has gone along with the changes, but with comment and reservation.

Integrated high- and low-touch coverage teams are the future for brokers, Woodbine concluded after interviewing 41 U.S. asset managers.

However, not every buysider believes the two groups should be situated together, nor are the majority comfortable with both high- and low-touch roles being handled by the same person-the so-called "one-touch" model-despite any expected increases in trading efficiency.

Woodbine asked survey participants about their preference for coverage by a team of high- and low-touch professionals situated or sitting together. On the question "Do you think that a team of sales-traders and execution consultants, situated together and highly knowledgeable about your firm's alpha generation approaches and trading practices, would provide optimal service?" 56 percent of respondents agreed that such an operating model would be beneficial. Forty-four percent disagreed. Of those who agreed, they said a unified desk would improve efficiency and overall service. Those who disagreed said this model would only serve to amplify the negative aspects of the broker business.