It’s that time of the year again – when badge scanners, tchotchkes, industry leaders and new ideas fill a massive room with vendors and capital market firms alike. Yes, I’m talking about tradeshows.
With the highly anticipated event, TradeTech Europe, just around the corner, I thought why not recap one of their sister events that I recently attended in New York? The “Institutional Equity Trading and Technology
” Conference was two days of knowledge sharing and thought leadership. The small setting helped create an intimate space, making it more manageable to exclusively speak to other attendees. All of the booths were confined to a single area, making it convenient to visit the exhibitors in an efficient manner. Best of all, the food was quite good too.
Not to be outdone by the chefs, the keynote speakers on both days had cooked up equally appetizing sessions. Matthew Andresen, with Headlands Technologies, not only explained evolving market structure in an understandable way, but he also brought an insightful, historical perspective to the discussion that provided context and helped glue the pieces together. The Lou Dobbs interview with Mark Standish, co-CEO of RBC, and John Shrewsberry, President of Wells Fargo was also excellent; both provided great high level perspectives on the global economy, the US recovery, and some of the activities their respective banks were engaged in to drive value for their customers.
In addition to the keynote speakers, the breakout sessions also helped validate what I’ve been seeing in the trading industry for the past year. The evolving role of the trader and the evolution of the buy-side emerged as the key themes during the sessions:
The evolution of the buy-side
There are significant changes occurring in the way that the buy-side and sell-side interact. With the proliferation of high frequency trading (HFT) and other new technologies, the buy-side operates increasingly independently, relying less and less on the sell side. Also, rather than relying solely on the sell-side for execution services, the buy-side is starting to call the sell-side for advice on how to adjust and tweak their algos, based on certain market environments and investment strategies. So the sell-side often finds itself in the role of execution consultant. In addition, the drive for best execution and lower commission costs has clearly resulted in a steady growth of electronic execution. However, that growth in electronic execution must still be balanced with a steady high touch order flow, since it’s the high touch orders that pay for the research, access to capital, and other services provided by the sell-side.
The changing role of the trader
The role of the trader is evolving, and the successful ones are learning to work more closely with the Portfolio Manager, and share more of a macro view that includes overall portfolio strategy and position management. Although they’re working closely together, it does not appear that the roles of the PM and Trader are actually merging.
Order flow generally takes one of two paths – while the smaller, more standard orders are handled by smart order routers, the more complex, illiquid orders are handled by traders.
Attracting order flow, and being easy to do business with are two important goals for sell-side firms. As complex, cross-asset trades increase in popularity, some sell-side firms have created desks dedicated to fielding those requests, in an effort to simplify the process for the buy-side clients. This gives the buy-side firm a single point of contact, rather than having to talk to each of the individual desks representing each asset class involved in the trade.
As the balancing act between high and low-touch execution continues, firms are investing more in the ability to perform a Total Cost Analysis (TCA) for trades, to better understand all of the cost elements, and ultimately, profitability. Different groups within the firm want to look at the data in different ways; it’s used internally, to better understand the total cost of trades, but also externally, with clients, to help explore hypothetical market ideas, and to project costs.
Overall, TradeTech events are a class act, whether it’s in Chicago, New York, or London. The upcoming TradeTech Europe conference
will be no exception, and best of all, IPC will have some exciting announcements to share. Hope to see you in London!