10.20.2017
By John D'Antona

FLASHBACK FRIDAY: Low-Touch Equity Trading Stalls

Just as the death of the human trader was overpublicized, so was the pronouncement that low-touch trading was going away too.

But what is the state of low-touch trading in the current market structure? And how will upcoming regulations, such as MiFID II affect trading.

While electronic trading might not be growing by leaps and bounds anymore in today’s mature market structure, has it evolved from its plug-and-trade roots into something else?

The proverbial jury still seems to be out.

This ongoing debate comes amid the backdrop that the buy-side trader has very recently come out and openly said it still wants the human sales trader on a phone ready to discuss the equities market, get that actionable insight, and the order. While algorithms are OK, they will not replace the human in terms of need and importance.

In a recent study titled “The Voice of Trading” by Greenwich Associates, the market consultancy noted that voice communications remain a “still essential” component of institutional trading. Despite the trend towards electronic trading, voice communications between traders and their clients still sit at the heart of global financial markets, they write.

The report illustrates that despite the undisputed fact that algorithms, dark pools and electronic market makers have transformed trading, institutional investors actually execute the majority of their order flow via “high-touch” channels—usually via telephone.

And while high-touch trading and low-touch or electronic trading have historically been siloed and completely independent of one another, voice communications now play a role even when trades are routed through electronic channels. Greenwich data uncovered that 9 out of 10 of the trading professionals participating in a 2016 Greenwich Associates study use voice communications in electronic trades, primarily for post-trade interaction – either discussing trade performance and receiving allocation instructions – and pre-trade interaction such as confirming order receipt, discussing market conditions or expectations for the trade.

In yet another report from earlier this year, the market consultancy said that low-touch trading (not including crossing networks or portfolio trading) is at 31% for year ending 1Q17, with most traders surveyed expecting that to grow to 36% in 3 years. So, there is room for some growth but not much.

As one analyst told Traders Magazine, a growing number of high-touch traders are using algorithms/electronic trading tools themselves to remain more relevant, so the percentage of high touch traders remaining high reflects more of a “hybrid” high-touch/low-touch approach on their part.

In a recent conversation with Markets Media group, parent of Traders Magazine, New York-based Clearpool discussed how it has enhanced its client portal in a way that company executives say changes the dynamic of electronic trading. The new dashboard embeds a series of collaborative real-time trading tools that are meant to raise the bar on dialogue between the buy side and the sell side, and improve the quantity and quality of the ‘color’ that brokers provide to clients – something that was thought to be lost in the electronic revolution of yesterday.

The product is a bit of a paradox in that it is a new technology, but its value-add is that it turns back the clock by ‘repersonalizing’ the buy side — sell side relationship

Wald noted that the data visualizations presented on the portal can quickly and intuitively show whether a trader is being too passive or too aggressive, or if there’s an issue with a certain venue, or if the market overall is doing something unexpected. “It’s about having data that you can use, and helping the buy side understand the footprint of their order,” Wald said.

“It’s actionable insight, which is a better reason for a broker to pick up a phone,” Wald said. “This is the more fruitful conversation that the buy side has been demanding, and it’s the conversation the sell side wants to give but hasn’t had the tools to do so.”

And why might a trader want actionable insight aside from alpha acquisition as Wald said? How about upcoming reglations such as MiFID II, slated to go into effect January.

Craig Viani, Execution and Quantitative Specialist at Liquidnet, told Traders Magazine that there is a MIFID II angle when it comes to the low-touch/high-touch trading conundrum.

“Just like Reg NMS was a catalyst for its initial growth, e-trading is likely to get a boost from the current swell of regulations from over the pond,” Viani began. “As MIFID II applies steady pressure on unbundling, electronic brokers will benefit from these tailwinds as buy-side traders shift their priorities and commission management through trading takes a back seat to best execution. No longer “constrained by institutions’ needs to parse out trades and commission payments, it’s likely a handful of the remaining electronic oriented brokers who have survived the market volume drought of the last few years, will be the greatest beneficiaries.”

 

The original article appeared in the October 2015 edition of Traders Magazine 

Growth in Low-Touch U.S. Equity Trading Stalls at 33%, Unchanged Since 2012

By John D’Antona Jr.

Is this the beginning of the end in electronic trading in stocks?

Could high-touch trading, which fell out of favor as commissions dropped after 2009, be making a comeback?

According to a new report from Greenwich Associates, after years of robust growth, e-trading (low-touch) volumes in U.S. equities have hit the proverbial wall. The amount of trading this way hasn’t grown since 2012, the firm said, noting recent run-up in electronic trading has been dealt a blow by a combination of increased market complexity, high levels of business concentration and competing demands for order flow.

The results of the Greenwich Associates 2015 U.S. Equity Investor Study show that institutions over the last year executed about one-third of overall U.S. equity trading volume electronically-a share essentially unchanged from the prior two years.

These results, which are based on interviews with 243 U.S. equity portfolio managers and 321 U.S. equity traders, prove that although e-trading is nearly ubiquitous among institutional investors, usage has plateaued. While 90% execute at least some of their trades electronically, over the last four years institutional investors consistently executed only one-third of their U.S. equity volumes through broker e-trading offerings.

In a new paper, “U.S. Equities: The E-Trading Stalemate,” Greenwich Associates finds that the lack of growth is due to:

1. Competing demands for order flow. E-trading volumes are constrained by institutions’ need to parse out trades and commission payments to brokers as compensation for research and for capital commitment.

2. Market complexity. Due to regulations and a host of other factors, market structure is becoming increasingly complex. With waves of e-trading product offerings from smaller brokers and an influx of new, indistinct matching engines, electronic trading seems to be adding to this complexity rather than solving it.

3. High Levels of Concentration. While market structure and the menu of available electronic offerings become increasingly complex, institutions are clear in what they want from their execution platforms: simplicity, reliability and responsive support.

“Today, equity desks interact with around 40 brokers annually,” said Craig Viani, Greenwich Associates Vice President of Market Structure and Technology. “Of those relationships, roughly 70% of e-trading is executed with the top 2 brokers.”

Viani added though it wasn’t time to throw the baby out with the bathwater, just yet, and e-trading volumes will eventually return to growth.

“Technology improvements on both the buy side and the sell side, as well as the proliferation of transaction cost analysis (TCA) and increased availability of intra-trade performance measurement by venue, should help e-trading volumes break out from their current plateau in the next 18-24 months,” Viani concluded in the report.

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