The buyside is taking control of it trading-from algorithms to order handling to venues-and relying less on the sellside.
When it comes to the sellside and its order handling, the buyside is simply fed up with what it sees as order routing that benefits the brokers and not its own interests. Orders go to where the biggest rebate can be acquired, or orders are internalized or go to brokers own dark pool.
In a game-changing move, the buyside has opened its own dark pool, IEX. This new venue is aimed at providing best execution to the buyside by using some features theyve clamored for: no rebates for order flow, offering a limited number of order types and not co-locating client servers with its own matching engine.
The sellside is IEXs customer. And they are joining quickly, said Ronan Ryan, chief strategy officer at IEX, who recently told Traders Magazine that most of the bulge firms are already signed on to send orders to IEX and discussions with other brokers are ongoing. All orders sent to IEX must come from a broker-dealer, else it risks losing a buyside clients order flow. There is no minimum order size required to trade at IEX, and it offers clients the ability to set minimum quantity parameters on their orders.
Buysiders also want to know how their algorithms work. Money managers want to know exactly how their orders are sliced and diced, and they want a greater level of transparency from their sellside providers and others. According to a recent report from consulting firm Woodbine Associates, buysiders said the sellside has to either explain their algorithms workings in a straightforward manner or watch order flow go elsewhere. Only 46 percent of those surveyed said execution consultants can clearly and succinctly describe the operation and mathematical underpinnings of their algorithmic offerings.
For the past couple of years, buyside traders have been lobbying their brokers and the regulators behind the scenes to green-light a pilot program that would either lower exchange rebates for certain stocks or replace the maker-taker regime with a fee-say, three mils-on both sides of the trade.
The money managers concern is that brokers may be routing their orders to venues that pay the highest rebates, rather than those that offer the best execution. In such a case, the broker pockets the rebate and the buyside gets an inferior fill.
Any inducements to order flow routing insert a conflict of interest, Andy Brooks, head of equity trading at fund managers T. Rowe Price Associates, said at a recent ICI confab. It is an issue. I want to see it addressed and experimented with and challenged.
Others want to see order routing decisions addressed too. A consensus of traders from 37 buyside desks who participated in a workshop put together by broker-dealer Bloomberg Tradebook was that they want more transparency in order routing.
Fidelity Capital Markets has launched a free service for the buyside through a vendor unit that lets buyside customers set up their own routing logic, circumventing the sellside altogether. This vendor-based offering competes directly with the brokers and is in use, FCM said, by some of the biggest buysiders, who dont want to cede routing control to their brokers.
We need more control, as trading has become so fragmented and you need to be everywhere, said Nanette Buziak, head of equity trading at ING Investment Management. We need to maintain full control of an order in this complex environment. It drives me crazy when my order goes to a high-touch cash desk and the order gets thrown into an algo anyway-I might as well keep control myself and use an algo.