For Lionel Mellul, the second time around opening a U.S. trading desk will hopefully prove the charm.
The former co-founder and chief executive of now-defunct Momentum Trading Partners is looking to carve out a niche for himself by offering white-glove, high-touch service to a select clientele. Mellul recently joined Britain’s Sunrise Brokers as a managing director, cash equities, to open an equity trading desk in New York City.
The strategy is simple: Keep the ratio of institutional accounts to sales traders as low as possible. This way, traders know their client’s needs in an intimate way and can provide them with the highest level of personalized service and execution. At the same time, the buyside knows coverage is focusing on them and a select few others-not a long line of customers.
Research is also a part of the package. Sunrise employs a handful of analysts in the U.K. who offer quantitative, technical and fundamental analysis on mostly European companies. The research effort is in build-out stage. Mellul plans to offer his U.S. clients research on European companies.
On the face of it, opening a high-touch trading desk during the current slump might seem foolhardy. Many brokerages that offer high-touch services have been trimming staff or combining cash desks with their electronic counterparts into a hybrid “one-touch” trading model. Tabb Group recently published statistics revealing that electronic trading now represents 79 percent of total U.S. equity trade volume, down from its peak of 82 percent in 2009, but still up from 65 percent in 2007. This shift in trading volume and execution type has claimed many brokers, including Mellul’s alma mater Momentum, which, he said, suffered from a lack of adequate funding.
But Mellul thinks now is the time to open a high-touch desk. He told Traders Magazine that because other brokers are pursuing more electronic means of trading, it opens up a slot for a more personalized, high-touch brand of trading. Reliance on algorithms and electronics, he said, can leave clients cold. Also, he said, larger brokers typically employ one sales trader per 30 or more institutional accounts. At Sunrise, he plans to keep his client list small and desk smaller, with a single sales trader covering only two or three firms at most.
Mellul had hoped to grow this model at Momentum when he started that firm in 2008. Due to the financial meltdown that immediately followed and the subsequent years of shrinking trading volumes and commissions, the firm just couldn’t survive. But Mellul wasn’t deterred, believing his business model could work, given the right circumstances. Now, five years later, he is employed with the London-based Sunrise. Management has invested in him and is allowing him to implement his vision and move ahead.
“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 said. “I’m confident my model works.”
Mellul arrived at his model after spending several years on various trading desks, both in the United States and abroad. A 20-year veteran of the financial markets, he first got his start trading in France in foreign exchange and derivatives. He has worked at several banks as a trader, including Crédit Industriel et Commercial Worldwide, Natexis and Commerzbank. He has served as a market maker in currency spot markets and also ran a foreign-exchange derivatives book, until the launch of the euro currency. Mellul has also done stints at Louis Capital and GFI, where he co-ran the institutional cash desk. In 2008, he co-founded and ran equity-execution shop Momentum, before shutting it down last year.
His experience trading across asset classes, from equities to fixed-income to foreign exchange, has given him a more holistic approach to the markets both from an investment perspective and market structure point of view, he said.
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The model Mellul has set up is based on the premise of keeping the client list short and the trading desk small and nimble. The 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.
Mellul sits right among his traders and research salespeople-four cash sales traders and three research salespeople, covering just 10 institutional accounts. He has plans to grow the desk to nine people-five sales traders and four research sales. The desk has been handpicked by Mellul himself, 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 who 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, that I can train with my flavor and mold. I want to guide my traders.”
Cost-cutting by larger firms, Mellul added, has allowed Sunrise to find the types of traders he wants and pick 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 eventually 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-to-3 or thereabouts.
“I’m not in a rush,” he said. “Management knows what I’m doing and approves 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 and is now executing trades on behalf of 10 big institutional clients and hedge funds, which Mellul declined to name. But he did tell Traders Magazine that there others interested in his models, and this leads him to think 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, 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.”
At least one analyst thinks it is a good idea.
Sang Lee, managing partner at Aite Group, said that on the face of it, Sunrise’s business model is of value to the buyside, especially in today’s highly electrified marketplace. Help from the high-touch desk, he added, is even more valuable to the buyside when it is looking for less frequently traded stocks, such as small or micro caps.
“There is definitely a market for this type of specialty service,” Lee said. “In a world chock-full of electronic trading tools and services, there is always room for human intervention in the trading process.”
But while a low account-to-trader ratio sounds good, it may not be enough for some on the buyside
Keith Collazo, a trader at New York-based Tocqueville Asset Management, said that while there is a market for super-high-touch trading, he needed more information and service from his brokers.
“Just providing a super-high-touch trading experience in this environment might not be enough to move my needle to trade with them,” Collazo said. “For me, I need to know exactly what can you provide. What type of research or market access? Given my budget, there’s a lot that goes into the decision as to what broker I use-regardless of service.”
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