FLASHBACK FRIDAY: Come Together

Traders Magazine Online News, August 24, 2018

John D'Antona Jr.

So, does the buy-side still want a melding of high-and low touch desks in order to execute their order flow?

Back in 2013 when the high-touch and low-touch trading desks were still siloed and separate, the buy-side wanted the two to merge their efforts in order to achieve best execution and minimize information leakage. As the years progressed, the “one-touch” concept was born but only took hold at select brokers. Sales traders became execution consultants – versed on both latest electronic trading tools and how to source market color – but was the buy-side satisfied?

It’s five years later and the trend of merging or melding the desks continues, according to Brad Bailey, Capital Markets Research Director at Celent, Oliver Wyman.

“Since this story came out there have massive changes that have continued to drive and accelerate the trend toward a unification of high and low touch execution channels,” Bailey told Traders Magazine. “

In looking from both the buy-side and sell side perspective, Bailey explained that on the client side, overall cost pressures, more reliance on trading technology systems, a focus on more efficient trading workflows, better analysis of trading, and a demand for minimization of trading expenses were forcing the trend.

“On the sell side, cost pressures, automation, better unified desk management, and resolution of many of the battles between low and high touch desks on how to best provide client coverage and share commissions,” Bailey added, have pushed the trend.

He continued to note that this trend doesn’t hold up as much when in illiquid stocks, where a delicate touch is required or a multi-day or week execution.

Spencer Mindlin, capital markets analyst at Aite group agreed. Speaking to Traders Magazine, he said the buy-side will continue to seek their brokers to align or combine their high-touch and low-touch execution services.

“The needs of the buy-side trader haven’t changed. But pressures to normalize workflows and relationships and reduce costs continue to increase,” Mindlin said. “The frustration that the buy-side has with some of its trading partners on the sell-side that have attempted to consolidate both channels is that the required skills set or pedigree for someone in a high-touch role is quite different from that for a low touch role. It’s still rare for one person to be able to fulfill both.  Sometimes traditional high touch sales-traders are less fluent in how to advise on how to navigate electronic trading tools and market microstructure, and also explain their performance of an algo and present a TCA report. And some low-touch electronic coverage folks that may know the ins-and-outs of market-microstructure and how a trading algorithms work, but be less familiar with all the research, lending, access to block liquidity, and execution channels and services that the asset manager utilizes across the bank.”

He added that this “yin-and-yang” between high tough and low touch has been a source of strife for years at banks.

“Electronic trading units have sometimes been treated like the red-headed stepchild at some banks. High touch sales-traders often didn’t understand electronic trading offerings and felt threatened by the them,” Mindlin explained. “But since the high touch sales-traders often spend the majority of their time interacting and providing high-touch service, they feel like they own the relationship with the client and claim attribution on the commission wallet paid through low-touch channels. Some banks have tried to solve these problems by strategically aligning both high-touch and low-touch under the same reporting lines with varying success. These attempts have had mixed success over the years.  It’s rare to find managers with the leadership skills and a thorough appreciation of the clients’ needs, firm’s capabilities, and technology savvy to manage it all. Culture plays an important role.”

Another facet here that Mindlin discussed was how has the joint execution affected the brokers? Has it brought more pressure on commissions?

“Joint execution has definitely affected the brokers,” Mindlin began, “On the one hand, it may have caused some pain in terms of commission pressure and headcount reduction. But on the other hand, it’s enabled them to think more holistically about net client profitability, and which clients they want to keep and which clients the bank is operating at a loss. Often, a consequence of keeping these businesses separate is that it often results that one hand is not talking to the other, and the bank doesn’t realize it’s not really making as much on the relationship that it thought it was.”

Celent’s Bailey added that while unification trend was originally unique to only equities, this same trend, of desk mergers between low and high touch is being found across derivatives, FX, and fixed income now.

The following article originally appeared in the August 2013 edition of Traders Magazine

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."

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.

It is an open question why 85 percent of the respondents welcomed a "unified" approach, but only 56 percent were OK with high- and low-touch traders situated near each other. Samelson explained that a "unified" approach can be had through being physically segregated but with an "open line" or similar, more sophisticated technology that fosters selective interaction between team members while controlling and limiting interaction with others.

In its simplest form, an open line is a phone where both parties can hear what is happening on both ends and communicate freely. An open line is something you saw on trading desks across regions in the past, like a squawk box, Samelson said.

Movement on the sellside to merge the two desks is based largely on cost-cutting needs and may lead to a single individual handling both the high-touch and low-touch trading needs of the buyside. Here, there was less optimism from the survey's respondents.

On the question of whether a single execution consultant can effectively handle the combined role of high- and low-touch execution consultant, 44 percent of the buyside said "yes," while 56 percent said "no." Firms relying heavily upon both high- and low-touch resources question the ability to combine the two roles, while those buysiders who use only one desk favor the combining of the roles.

Institutional traders are also worried about information leakage between the two desks and the revelation of trading intentions. A unified desk could mean less information leakage and improved order-handling efficiency.

Chip Coleman, director of trading at Richmond, Va.-based Thompson, Siegel & Walmsley, told Traders Magazine he agreed that unification between the high- and low-touch trading desks was good.

"I view my interaction with the broker, either through high- or low-touch, as a unified relationship, and I think most of the buyside feels the same," Coleman said. "In my view, the Street looks at the services being supplied and the commissions being generated for those services, whether high- or low-touch, as one relationship."

However, Coleman noted that buysiders like him will have to pay particular attention to what type of information is released to a broker employing a unified relationship model. He said this is especially important when a buyside firm has multiple traders trying to keep their intentions quiet from each other, as well as other firm's traders.

"I see this as a major hurdle, with some under a unified coverage setup," Coleman said.

Bridgeway's Jennings agreed with Coleman, adding that he'd only want his information shared if he specifically asked the high- and low-touch desks to share liquidity opportunities he wouldn't see otherwise.

David DeVito, head trader at Madison Investment Advisors, a money manager based in Madison, Wis., said if a unified approach can couple high-touch service with low-touch trading, then an integrated approach makes sense to him.

"In my ideal world, I'd pay higher commission rates for low-touch trading, but in return receive the alpha-generating market intelligence of high-touch coverage," DeVito said. "I dislike the cost of high-touch, but I also dislike the race-to-the-bottom-of-commission-rates mentality of low-touch. I'd like to see a true unified hybrid approach."

For more information on related topics, visit the following channels:

• Brokerage
• Buyside
• Flashback Friday