Sell-Side Electronic Trading:
Industry Reacts to New Generation of Hackers | A New Way to Attack Market Data Costs | The Hidden Cost of Trading | In Fixed Income, FIX Is a Post-trade Solution | Algorithms Multiply to Match Trading Strategies |
Sell Side Goes Boldly Beyond Basics
Competition spawns catalogues of technical and analytical tools
November 21, 2006
Major brokerages have branched out well beyond traditional cash equities and trade execution. They're offering flashy direct-market access (DMA), algorithmic trading and prime brokerage services spanning an ever wider array of asset classes and order types. They have also been investing in regional exchanges and alternative trading systems (ATSs) to sharpen their competitive edge and to have a say in how market structures evolve.
Only a few years ago, a hedge fund or other institutional client had a limited menu of trading choices: call a broker, deal directly with a counterparty or buy a seat on an exchange. Today they can seek liquidity, click and trade with an abundance of DMA and smart-order routing technologies and algorithms; scan as many ATSs and electronic communications networks (ECNs) as they wish; coordinate their activity via order management systems and execution managements systems (EMS); and monitor and control costs and risks with transaction cost analysis, commission management and other high-performance software. Institutions can finance and clear trades through prime brokerages, get research from their analysts, and do pre-trade analysis and charting. The options seem endless but are increasing all the time.
Larry Tabb, founder and CEO of Westborough, Mass.-based research firm Tabb Group, says, "You can't just have a good sales trading desk or good algorithms anymore. You need lots of arrows in your quiver to grab business." A Tabb report, "Institutional Equity Trading in America 2006: The Return on Relationship," says, "In an ideal world there would be an a la carte menu of services with an associated price for each item."
The sell side is beginning to get the same idea, adding or buying into any services that look like they can offer better execution or liquidity to buy-side clients.
The virtual stampede to low-cost, lower-touch trading got going when commoditization of liquidity and execution, accelerated by decimal pricing of shares, prompted a collapse in margins and, consequently, in broker commissions. Trader jobs were cut--Tabb Group says there are 14 percent fewer cash equities personnel employed today than in 2000.
UBS is one bank that has gone the more-arrows-in-the-quiver route, without forsaking its commitment to client relationships. Larry Leibowitz, the firm's COO for U.S. equities, says, "It is a matter of the relationship. I don't think of selling cash equities when I look at a client. It is the whole UBS package--prime brokerage, algorithms, advice."
Sang Lee, co-founder and senior analyst at Boston research firm Aite Group, says, "Banks have to look at their infrastructure and work out how to continue without going bankrupt." Technology such as the FIX messaging protocol has made it easy to offer automated platforms for "mundane tasks," says Lee, allowing sales traders to "focus on the harder stuff--do a lot more with a lot less." And the hunt for technology has sell-side firms buying outside solutions.
UBS, for example, gained both DMA technology and order flow when it acquired the capital markets division of Charles Schwab & Co. in 2004. The deal included a third-party execution business and a sophisticated Nasdaq Stock Market trading system. UBS has made a series of other strategic investments, starting with a minority stake in the Philadelphia Stock Exchange (PHLX) in April 2005. In April this year it along with Goldman Sachs & Co. bought a stake in high-tech agency brokerage UNX, and it is a backer of the recently formed Block Interest Discovery Service ATS.
