Trading is better the second time around. That’s what Lionel Mellul hopes.
The co-founder and chief executive of now-defunct Momentum Trading Partners in New York is now the managing director at Sunrise Brokers, a London-based dealer in equity derivatives.
This time, he is looking to carve out a niche for himself in New York by offering exclusive high-touch service to a select set of clients.
The strategy is simple – keep the ratio of sales traders to institutional accounts as low as possible. Traders then get to know their clients’ needs intimately. Clients in turn get personal – and better — service and executions.
Conversely, the small group of institutional firms that Sunrise serves know its coverage is focused on them, not a vast book of clients.
Opening the firm’s first U.S. high-touch trading desk when trading volumes are dropping almost monthly and the amount being handled electronically is rising might seem foolhardy.
Indeed, many brokerages offering high-touch services are downsizing or combining cash desks with their electronic counterparts into a hybrid “one-touch” trading model. Nasdaq OMX figures show average daily trading volume in April at 6.4 billion shares, representing a reversion to the pre-crisis level of 6.7 billion shares a day in April 2008.
Tabb Group, in turn, recently published statistics that show electronic trading now represents 79 percent of total U.S. equity trade volume. That’s down from its peak of 82 percent in 2009, but still up from 65 percent in 2007.
This trading volume and execution-type shift has claimed many brokers, including Mellul’s alma mater, Momentum, which served hedge funds.
But Mellul thinks now is the time to open a U.S. desk. Sunrise has a cash equity trading desk in London already, with which Mellul works. He told Traders Magazine that the movement to electronic trading is opening up a slot for a more personalized high-touch trading. Reliance on algorithms and electronics, he said, can alienate clients. And larger brokers have one sales trader per 30 or more institutional accounts covering them.
At Sunrise, he wants one sales trader to cover two or three firms at the most. Mellul had hoped to grow this model at Momentum when he started the firm in 2008.
The credit crisis erupted that fall and, for a time, volume soared, to 11.2 billion shares a day in April 2009, by Nasdaq’s count. But trading volume and commissions have shrunk every year since. And Momentum did not survive.
But Mellul wasn’t deterred. He believes the second time around the model will work.
“My goal here is to maximize my human resources and tap all liquidity wherever it is and provide a super high-touch experience for my clients,” Mellul told Traders Magazine. “I am confident in my model that it will work.”
His four execution and three sales traders sit in a small corner of Sunrise’s trading floor office in Midtown Manhattan, behind a glass wall that partitions it off from the rest of the firm to minimize information leakage. They service just 10 institutional accounts.
The desk is picked by Mellul – and he is particular about the type of sales trader he wants.
“I’m not necessarily looking for someone with a lot of experience – someone that will have to unlearn a lot of his past to adopt my way of trading and thinking,” he said. “Rather, I’m looking for someone a little fresher, either less experience or very little experience so that I can train them with my flavor and mold them. I want to guide my traders.”
Cost cutting by larger firms, he added, has allowed Sunrise to find the types of traders he wants, picking the ones that fit his style. And if that means growth takes longer for his desk, either in staff or new clients, so be it, he added. His goal is to grow his client list to 20 by the end of the year and hire another trader or two to keep his ratio of traders to clients at 1.3.
“I’m not in a rush,” he said. “Management knows what I’m doing and approve of the pace at which I am doing it.”
While the desk has only been open since last December with Mellul as its sole trader, it has hit the ground running. It is now executing trades for its 10 big institutional clients and hedge funds, which Mellul declined to name. But he did tell Traders Magazine that others are interested in his models and this leads him to think that these big firms do want and need more personalized service.
The thinking goes that once he builds trust with the big institutions, they will share their order book with him and let him work more of their order flow. This in turn will enable him to source liquidity before an actual order is given to his desk. That way, he can call a client and provide the market intelligence and alpha generating ideas that lead to a trade and become a partner with the buyside.
“Liquidity can be very virtual and volatile. One minute it is there and the next it is not,” he said. “I want to erase all conflicts between the desk and client and be open about who we are and how we do business. My job is to take all that I know and give it to them and work together to find the liquidity they are looking for.”
One way he does this is by providing daily market intelligence to his clients. This is not the standard stock list that many brokers send out each morning, recommending securities to buy or sell or those posting earnings.
Rather, in Mellul’s items, financial markets are reviewed in their entirety. They cover all assets classes and illustrate where and how equities might play a role and how to trade them.
By adding this type of commentary, he believes this will prove to clients that Sunrise is agnostic toward any particular stock and is an agency-only brokerage serving their best interests.
Mellul can write on such varied asset classes thanks to knowledge of the capital markets, having spent time trading in both the U.S. and globally. Mellul, a 20-year veteran of the markets, started trading in France in foreign exchange and derivatives. He has worked at several banks as a trader including Credit Industriel et Commercial Worldwide and CommerzeBank. His experience trading across asset classes means he has a holistic approach to the markets both from investment perspective and market structure perspectives.
This differs from other brokers who rely on research paving the way for trading. Back in March, Deutsche Bank announced it was opening a new small-cap trading desk. Joe Spinelli, head of North America cash equity trading, told Traders Magazine in March that the new small-cap team will be a stand-alone business within the firm’s high touch offering.
The bulge firm planned to leverage its investment banking and research to assist the trading desk. The firm provides research coverage on 259 small-cap stocks, or roughly 31 percent of its corporate research offering.
“As the industry struggles with market volumes, clients and not just mutual funds, are ironically, spending more time on small- and mid-cap stocks,” Spinelli said. “Alpha has proven to be elusive in the large cap arena, causing clients to spend more time moving down the market cap spectrum.”
Spinelli said in an interview that Deustche Bank traders will follow the traditional high-touch trading mode – telephony and elbow grease, much like Sunrise.
Using small-cap algos can add value to executions, but they often fall short in creating the liquidity that clients seek in this less liquid segment of the market, Spinelli said. Therefore, the need for more of a traditional high-touch approach that incorporates block trading expertise is essential.
Mellul agreed with his bulge counterpart that algorithms can, at times, be a useful trading tool. But Mellul added that he plans to use algorithms in a less passive way than others might. Rather than dump an order into an algo and watch the algorithm work, Sunrise plans to use algos selectively and monitor order flow sent to them and adjust as needed. This way, the desk traders still have control over the algo and minimize any type of adverse price selection.
“When you are passionate about what you do, you can use technology and its advantages and couple it with the human element,” Mellul said. “I don’t use algos in a passive way; rather we use them actively and tweak them as the trade progresses. They are instruments to be used to find liquidity but not the only way to find liquidity.”