FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
In the October 2017 issue of Traders Magazine, it was argued that despite the fact that algorithms, dark pools and electronic market makers have transformed trading, institutional investors were executing the majority of their order flow via high-touch channels.
In the same article it was mentioned that the percentage of high-touch traders remaining high reflects more of a hybrid high-touch/low-touch approach on their part.
In this article we look at the state of low-touch and high-touch trading in the current market structure.
According to Andrew Actman, Managing Director of Business Development at Sterling Trading Tech, the trends for both are all around flexibility and the breadth of the offering that the trading systems can offer in addition to the ease of access the systems.
“COVID has shown us that not only do these systems need to perform well in an office environment but also at home and on the road traveling,” he said.
Actman argued that buy-side or sell-side traders like functionality on the trading system that allows them to “work” orders (high-touch) and “monitor” orders (low-touch) efficiently and effectively.
“In order to do this it requires both functionality and a large connectivity network that allows both high touch and low touch to effectively monitor their orders,” he said.
Meanwhile, Dan Romanelli, Head of Relationships at Broadway Technology, said that one interesting trend is an increased interest in automated, low-touch workflows not just from sell-side desks but from the buy-side as well.
“A common theme here is aggregation of the wide variety of venues and liquidity partners,” he said.
Actman said that you will always see a dependency on the low-touch business model, however that does not eliminate the need for the high-touch.
He said that Equities and Listed Derivatives are more liquid asset classes and were the first to adopt Algos, whereas FX, FO and FI are now adopting the use of electronic trading (streaming quotes and RFQ), in additional to using broker algos. “Also, more trading desks are seeing more order flow to handle and firms need low touch functionality to deal with that,” he said.
Broadway differentiates by bringing their expertise to bear specifically on the opportunities in the fixed income market, said Romanelli: “Globally we see momentum in fixed income trading workflows moving to electronic processes – from price discovery to straight through processing into clearing and settlement.”
When asked about buy-side preferences, Actman said it really depends on who the buy-side is and what their relationships are, that will then determine high-touch vs low-touch. “Some client demands are better served by High touch and vice versa,” he stressed.
He added that pre-trade, real-time and post-trade are key requirements for both types of business. This includes pre-trade risk and margin, real time order management and risk and post trade. “This requires both an OMS that can handle those pre-trade requirements and real time management and then a risk, order management and margin system that can handle post execution,” he added.
Challenges and future of high-touch vs low-touch
Actman further said that with the always evolving methods of execution/order types and client demands all for both the high-touch and low-touch side of the business, the challenge from a technology perspective is to make the systems more intuitive to be to keep up with the changes in the market place both from and EMS and OMS perspective.
Romanelli added that garnering consensus and budget for modernizing these trading processes remain the main challenge for any desk. “Platform changes need to demonstrate a real return, or ability to generate alpha, in reasonably quick time frames to move from the ‘nice to have’ bucket to ‘need to have,” he said.
When asked about the future of high-touch vs low-touch trading, Romanelli said that highly fungible, easily defined products will continue to naturally find their way to central limit order book (CLOB) style low-touch trading. “Similarly, more complex and unique risk management situations will require people to help solve for the best client outcome,” he said.
What is interesting with this question, Actman added is that a few years ago people thought it would be the decline of the high-touch business, but as we see today the industry has a need for both high and low touch.
“It will continue to evolve especially with the technology enhancements like AI, Machine Learning, Cloud-technology, etc.,” he concluded.