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The Power of One

By aligning technology and goals, buy-side traders can gain a competitive advantage

Whether or not a true “one-touch” trading desk exists at some future point, many of the primary benefits that such a desk would offer are already being achieved. That “one-touch” desk, were it to exist, would seamlessly integrate the same advanced technology across high- and low-touch functions, but traders are already identifying the tremendous value and opportunity to be gained by using brokers who are collaborating across the same technology platforms.

Take, for example, the Tick Size Pilot Program announced in late 2016 which widened the minimum quoting and trading increment for some small cap stocks. It also offered a window into how, by leveraging the same technology, insights could be shared in real time a la a “one-touch” experience. If both the high-touch and low-touch desks were leveraging an Algorithmic Management System (AMS), then during the pilot when the low-touch desk observed how liquidity was shifting between venues, it could in real-time share that information with a high-touch desk. The real-time sharing of that market structure information and insights would allow routing protocols to be adjusted on the spot, and best ex protocols to be met.

“In many respects people said that the Tick Size Pilot was a failure,” says Joe Wald, CEO and Founder of Clearpool, a provider of holistic electronic trading technology solutions. “We saw it as a harbinger of really good things to come, because if traders were collaborative, and paying close attention to how liquidity shifted, then based on the way the pilot worked, you were able to achieve better quality execution as long as you were nimble enough to adjust your routing protocol, and your routing protocol was able to shift in real time.”

Seamless integration across desks

Even if the one-touch desk is, strictly speaking, not a real thing, the experience and feel of it can be created for buy-side traders to help them gain a competitive advantage. The key component of making this a reality is to work with brokers who have at their disposal the technology to seamlessly service high- and low-touch needs. It makes perfect sense when you consider that most high-touch business is ultimately executed electronically – and it follows that brokers who use the same technology across desks are better able to analyze performance holistically and customize algorithms that help the buy side achieve their specific trading goals.

“If you have a venue analysis tool that is shared between brokers and buy-side traders, and you also have an AMS that allows you to configure the routing protocol, you can leverage real-time analysis to see what is happening,” says Wald. “The result is that you can achieve better quality execution, because by collaborating with your sell-side trader you achieve increased transparency and control.”

Holistic view helps smooth integration

The starting point for seamless integration is to accept the premise that from a holistic viewpoint, the most important thing a trading desk can deliver is high quality execution. With that objective firmly established, the action begins by taking the steps that allow for optimized collaboration.

“You can think of it almost as assembling a ‘pod’ of expertise,” says Wald. “This effort is most likely run by the sales trader who has the relationship, but it is enabled by an electronic trading desk and a block desk using the same technology – technology that allows the desks to communicate seamlessly within the system and complement the human collaboration.”

Having someone with microstructure and transaction cost analysis expertise on the desk can provide additional insights which help inform a sales trader’s recommendations to their buy-side client on what they can do to achieve their trading objectives given the market conditions.

The integration of technology and human skill is vital to all of this, of course. In that regard, Wald advises that it’s important to assess who will have access to real-time analysis, what expertise is available on the market structure side, what work will be done when new venues or pricing models roll out, and what tools you have at your disposal to be able to simultaneously look for the other side on a high-touch level, but also to be in electronic conditional venues to be able to achieve your goals.

“It’s a true collaboration that requires expertise from the sales trading side, as well as the microstructure side,” says Wald. “Traditionally, many trading desks have a very siloed approach, and that results in a low-touch desk using a completely different system than the high-touch side. You have traders in the middle who are negotiating, working on block trades, and committing company capital to things that aren’t competently tied into what’s happening on the low-touch side. Ultimately, the buy-side ends up paying it for because the desks working their orders are not plugged-in and sharing market structure information in the right way.”

Siloization of that type creates inefficiencies that needn’t exist – and cannot exist if the ultimate goal of high-quality execution is to be met. All of this can be overcome, says Wald, “with the capability to share the same technology in real time. That’s when everyone is on the same page, and everyone has value-added insight and transparency as things are unfolding.”

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