The buyside does not understand the difficult steps the sellside must sometimes take to find liquidity, according to several sellside traders contacted by Traders Magazine.
Whether or not this is true, some sellsiders say the buyside must hear their case. The target of tough talk by critics of market structure in the U.S., these sellside pros were taken to task by buyside traders in a recent Traders Magazine story. The buyside meted out the usual criticism of the sellside, ranging from a lack of capital commitment to a call for more privacy in the handling of block trade data.
Now the sellside is hitting back: The buyside, it complains, does not comprehend the enormous difficulties dealers must face.
Decimalization is exacerbating market structure problems, especially on the listed marketplace, according to a veteran trader, Barry Small, president and chief executive of Weeden & Co. in Greenwich, Conn. "We [institutional traders] are being disempowered and disengaged from market information," he said. "We are being disconnected from price and quantity discovery."
The biggest problem dealers have had with decimalization is a lack of liquidity in a penny environment, another pro complained. "There are no commissions to be made," according to Jim Whipple, head of capital markets with C.E. Unterberg Towbin in New York. "Decimalization has changed the layout of the land and has made it impossible for us to find the real liquidity."
Decimalization, Small added, has created an environment where both institutional investors and traders are reluctant to place limit orders.
"As we go down to smaller increments," he said, "there is less market information displayed."
One of the biggest problems facing institutional traders, he said, is the lack of protection for limit orders, the "very foundation of the market."
Indeed, Small was blunt: "When you discourage limit orders from coming to the market you are going to wind up with a different market. This market will be more volatile and it will have more velocity."
The buyside complaints are driven by perception, according to one sellside pro. "I think the perception on [the buyside] is that the sellside goes around telling everybody what they have," said Aldo Parcesepe, senior managing director and head of Nasdaq/OTC trading at Bear, Stearns & Co. "But the reality is that the sellside tries to find the other side."
Other sellsiders said decimalization is a secondary issue; that the tension between the buyside and the sellside stems from a misunderstanding of their role.
"The buyside can help by telling us when it doesn't have value-added information," according to Scott Jones, national sales manager for Jefferies & Co, in Chicago. In other words, sellsiders say their buyside colleagues should tell them more of what they hear on market conditions.
"The hardest thing between the buyside and sellside is the education of how things are operating," said Dennis Green, head of OTC trading at Legg Mason Wood Walker in Baltimore.
Said Green, "We have SuperSOES. We have decimalization. These are both two very important things that have changed trading. Once the buyside gets more of an understanding on how these systems operate, it will then understand the things that we are up against everyday in trying to execute orders for them."
The more one knows about one's sellside trader and how to explain what one needs from him or her, the better the chance of obtaining best execution, sellside traders say.
"We could use more feedback from the buyside. Give us input," Jones said. "I don't need to know what's going on overseas. I only need to know what's going on in micro-cap stocks. Tell us more of what you [the buyside] need and we can respond to it."
"Our skin is thick," he added. "So tell us where we are falling down and we will change it to make it right."
Some traders are even more frank. The buyside's impatience means the sellside's job is more difficult than it should be. Said one trader, who would not be quoted by name, "They [the buyside] caused fragmentation."
"They wanted direct access and they wanted to go to 10 ECNs," the trader added. "They want to work all of the ECNs while they are getting use of our capital. They are the ones complaining about fragmentation, but they are the ones who created fragmentation."
Another sellside trader complained that hedge funds are also causing problems for his desk. "They like to buy [stocks] as they are running up," the trader said. "They like to get on ECNs and get them [the stocks] running up in price."
Don't Understand
But again, the most common sellside complaint often is about decimalization. Either buyside pros don't understand it or it is taking time for the sellside to cope with it.
"With decimalization there are a lot of price increments. The real price isn't necessarily in the first three levels on the screen anymore," said Legg Mason's Green. "When you look at a screen there are lot of price [increments], yet they are only for three or four cents."
"Before, when you saw a screen full of prices it was very different – it would be a point difference," he added.
How difficult are the new economics of trading for the sellside? It is a question of survival for many firms, says Whipple of C.E. Unterberg.
"We cannot exist doing business for nothing, especially in the over-the-counter market," he said. "The bigger accounts are concentrating more and more on VWAP [volume weighted average price] orders. They try to stay close to those prices and they put limits on stocks. The reason you see things trading out of range all the time is because somebody [on the sellside] is adding a nickel or six cents to it – up or down – trying to make their commissions."
Whipple says that some buyside pros understand. But there "are some who don't. There are people who don't care where the P&L is, as long as they get their price…I think [this problem] is going to work itself out. Now that SuperSOES has come in, you are seeing bigger spreads again in stocks."
Customer First
Ultimately, Ben Marsh, head of OTC trading at Adams, Harness & Hill in Boston, said sellsiders must remember that buysiders, whatever their shortcomings, are their customers.
"I have to try to make their job go smoothly," Marsh added. "Because if it does, they will be my customer more often."
Sellsiders Speak Out
Dennis Green, head of OTC trading, Legg Mason Wood Walker, Baltimore, Md.
The hardest thing is education. We have SuperSOES. We have decimalization. These are both two very important things that have changed trading. Once the buyside gets more of an understanding on how these systems operate, it will then understand the things that we are up against everyday in trying to execute [orders] for them."
Jim Whipple, head of capital markets, C.E. Unterberg Towbin, New York
The bigger accounts are concentrating more and more on VWAP orders. They try to stay close to those prices and they put limits on stocks. The reason you see things trading out of range all the time is because somebody [on the sellside] is adding a nickel or six cents to it – up or down – trying to make their commissions.'
Scott Jones, national sales manager [listed and Nasdaq], Jefferies & Co., Chicago
We really try to get out information that they [the buyside] are going to care about and we really try to fine toothcomb it. I think their impression of [the sellside] is that we are just throwing it against the wall and seeing what's going to stick. We don't do that. What we could use from the buyside is feedback. Give us input. I don't need to know what's going on overseas, I only need to know what's going on in micro-cap stocks.'
