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.”
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