Finding liquidity is always a challenge, particularly in an environment like the one we face today, where volumes have slackened and liquidity is fractured. But it’s not just about getting your trades done. It’s about getting them done and achieving the desired results. TD Cowen’s TOM CAMPBELL and CARL HAYES talk to BEST EXECUTION about the growing trend in buy-side/sell-side cooperation as clients mix high and low touch trading approaches to optimise their liquidity strategy.
Campbell, who is head of EMEA electronic trading at the agency broker, and Hayes, who is head of EMEA sales trading, find that clients are looking for sell-side firms to act more as partners in the hunt for liquidity, not just service providers.
A challenging landscape
Liquidity is the lifeblood of any investment firm, but lately it may sometimes feel like that lifeblood has been in short supply. How should market participants handle their liquidity requirements in today’s tough environment?
Clearly, there’s a balancing act that needs to take place as buy-side firms weigh considerations, such as the need to tap into the widest possible liquidity sources, with factors such as expected slippage, the urgency associated with completing an order, and the importance of anonymity in the quest for best execution.
Without question, the buy-side is grappling with this challenge. For instance, one thing we’re seeing is asset managers becoming more selective about the types of liquidity they access For some, that may mean increasing duration to benefit from that performance improvement that higher quality interactions can yield. But probably the biggest shift that we’ve seen over the last few years is some clients adopting new workflows, the way they interact with their brokers and wanting their high touch trader to have visibility of their electronic and programme trading flow.
While some asset managers remain cautious and want to preserve anonymity, we’re also seeing some that are keen to ensure their brokers are maximising their interaction with the right kinds of liquidity. The chance of meeting that objective can be greatly enhanced when different parts of a sell-side can actively coordinate, on an order by order basis, for the benefit of the client
Recognising that liquidity can come from a wide variety of sources, buy-side firms that are going down this route are keen to ensure they use every tool in their arsenal. So, they will mix electronic trading, programme trading and high touch including the event driven desk to tap into the most optimal combination of liquidity sources.
Multiple options
Not every asset manager wants to adopt this approach at all times, and for some this hybrid strategy is used on an order by order basis.
At our firm, the default is for complete anonymity. There are plenty of clients that don’t want that to change, and it’s up to sell-side firms such as us to make sure that clients get what they want.
Technology also has a part to play, allowing clients to perhaps flag orders on a case by case basis using their EMS, or toggling visibility to high touch on and off, or only showing a proportion of the overall order that is working with the electronic desk, for example.
But given the results that some firms are getting by tapping into the full spectrum of trading options, we think the trend towards hybrid trading and inter-desk coordination has legs. This is particularly the case for long-only institutional clients. For them, the demand for liquidity is paramount given the relative size of their order flow versus what the market can bear at any point in time.
Trust and teamwork
What is involved in taking the hybrid approach? To begin with, there needs to be trust. Not every asset manager, particularly those worried about anonymity, are prepared to go down this route. Sell-side providers need to recognise this.
Another factor is the broker’s workplace culture. There needs to be a dedication to bespoke service. A hybrid trading approach works best when a provider is fully integrated, such as when electronic and programme trading teams are able to work side-by-side with their high-touch counterparts. Having a no-silo policy does not mean there are no specialisms – it just means that the different members of those specialist teams can work effectively together.
You don’t have to look far to find examples within some sell-side firms where the different desks view their internal counterparts as competition. While it may incentivise these rival desks in the short term, it is not always in the interest of clients, who could benefit greatly from a more  integrated, coordinated and collegiate approach.
The fact that the two of us – an electronic trading specialist and a high-touch specialist – are teaming up to author this article is evidence of how much value we think there is in this kind of integrated approach. It’s not about picking one desk or another, it’s about working across different desks to get the best outcomes.
Teamwork can extend not only across desks but between the broker and the client. We’ve had instances where we’ve worked with clients to investigate their own observations to help them understand if there is some broader market trend underway. They may come to us with a concern based on recent results, but not have the broader data to investigate and try to understand what’s leading to the outcomes they are seeing. But if they share their thoughts, we can determine if an issue is unique to them or more widespread.
The value of dialogue
We find that some of the strongest partnerships occur with buy-side firms that have a mix of skillsets on their trading desk as well, where quantitative and fundamental trading specialists work together.
But regardless of the client, what matters most is the dialogue. Providers and clients need to have running conversations about how best to interact with differing liquidity to get the best results. Both sides can bring important elements to the conversation. For instance, the detailed understanding a buy-side firm will have of its own trading activity can be combined with the wider perspective and access to data that a sell-side firm has.
The sell side can start the conversation by asking buy-side firms what matters to them and what their pain points are. Or, the buy-side can initiate the discussion by highlighting any concerns they have.
In other words, it does not matter who starts the conversation, only that it takes place and that it happens on an ongoing basis. Once this kind of dialogue gets underway, asset managers will stand a better chance of optimising their liquidity outcomes and getting the best results possible. Given today’s environment, we think that’s an approach worth investigating.
And if you combine dialogue with a bespoke service culture, state-of-the-art technology and strong trading capabilities, there is every reason to believe that asset managers who are up for the challenge of finding liquidity will succeed – in partnership with their sell-side providers.
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