Umberto Menconi*, head of Digital Markets Structures, Market Hub, Intesa Sanpaolo Group looks at the changing landscape of multi-asset agency brokerage services.
From ‘Wall Street’ to ‘The Big Short’, from ‘Liar’s Poker’ to ‘Market Wizards’, movies, TV and books have contributed to the mythical figure of the broker. The broker’s success is mainly due to the adrenaline-filled sense of power and ability to shout orders in a trading pit.
Historically, the relationship between broker and customer was one-to-one and mainly focused on order execution in a specific asset class via voice/phone. More recently, there has been a confluence of factors changing behaviour – regulation, increased digitalisation as well as the entrance of new players such as hedge funds and the increasing adoption of multi-asset strategies by portfolio managers.
Brokers had to reshape their business model if they wanted to cater to customers’ more sophisticated execution models and the demand for higher levels of execution quality. It also meant improving the search for liquidity and price discovery, which has contributed to the burgeoning multi-asset class philosophy among buyside execution desks and brokerage teams.
Having access to a comprehensive, multi-asset range of markets and services is not only key for buyside execution desks, but also for brokerage firms if they want to maintain a competitive edge. However, multi-asset trading has become more complex due to multiple venue access, market protocols and regulatory regimes all at the same time.
Technological innovation can support multi-asset trading. It is a much more cost-efficient way for brokerage firms to expand their service offering. Large asset managers may now choose to segment their trading teams more by the execution method (electronic vs voice, or high-touch vs low-touch) than simply by asset class.
This new approach requires different skills and a strong understanding of several types of instrument and their interaction. While a low-touch execution strategy can be better pursued by a team including quants and data scientists whose expertise is agnostic of the instruments they are dealing with, a high-touch, more specialised approach is focused on a smaller universe of traded instruments where the human touch is still crucial in the trading decision-making process. It is not surprising, given the variety in the role, that today the broker is considered one of the most sought-after jobs.
The complexity generated by this new multi-asset and multi-market approach may disrupt smaller customers’ trading behaviour. While larger financial buyside firms are becoming more auto-sufficient, smaller counterparts are having trouble competing in terms of implementation and technology costs. For this reason, the ability of a brokerage team to provide a one-stop, multi-asset execution shop may represent a business opportunity for an agency brokerage team, which is not only competing with new participants but also more sophisticated customer transaction cost analysis tools that can evaluate the performance of the execution strategy.
They need to offer flexibility in terms of price discovery, execution models and the processing of their transactions. This includes hybrid models, composed of voice and electronic, low touch and high touch business, as well as keeping a balanced cost structure leveraging internal or outsourced technologies.
A one-stop shop is a concept that originated in the United States in the late 1920s or early 1930s, especially within the consumer sector, describing a business model offering customers the convenience of having a comprehensive range of needs met in one location, instead of having to ‘drive all over the town’ to attain related services at different stores. The business strategy behind the one-stop shop is to provide convenience and efficiency to clients, while gaining loyalty as well as revenue.
From a financial perspective, dealing with a one-stop multi-asset financial agency brokerage shop requires not only the support of technology, but a new organisational approach. This encompasses different skills, behaviour and experiences in the brokerage team. This is because the digitalisation process is not homogenous in each asset class, and so the harmonisation and automation of the operating process cannot be the same everywhere.
A recent survey by GreySpark Research shows that “no single system can always provide to the buyside and sellside a comprehensive multi-asset trading technology with the functional capabilities coverage required to allow traders to switch processes and workflows seamlessly between any or all asset classes at will, no matter how bespoke they may be, and actually off-the-shelf technology vendor-provided solutions can cover only part of the cross-asset e-trading needs of a trading business.”
This is certainly true if focused on B2B Tier 1 and Tier 2 customers, where the specialised skills of their execution desk must face similar ones on the broker side, but it can fit better with B2B2C clients who prefer to delegate best execution and have different operational requirements, such as:
- A single commercial entry point;
- A multi-asset coverage of execution needs in a single hub, due to limited size of orders in each asset class;
- A tailored support throughout all the trading value chain process (from client onboarding to post-trade).
Execution cost control
A one-stop shop strategy can be implemented at various levels, depending on the type of customer, the order size, the specialisation degree requested by the instrument type and by market conditions.
Therefore, it is necessary to build a strong partnership with vendors on one side and with customers on the other, to better capture the changes in technology and in customer behaviour. If we do not grow up together in terms of innovation and technology, the infrastructure changes will be delayed. The success of this initiative is based on a strong collaboration between sell- and buyside, who need to walk together on this journey to a more efficient fixed income market.
Here is where the traditional relationships with the sellside, which are often incorrectly viewed as archaic and costly, are key. The challenge in making a multi-asset strategy successful is to strike a balance between the low-touch and high-touch approach. Trading multi-asset requires an understanding that a rigid execution strategy, whether that be product type, trading venue or broker relationship, might not be a solution that fits with client needs every time, and a more flexible hybrid approach is recommended.
When a higher trading quality level is requested and the human skills that come with experience become more important, it might be a winner solution to support:
- A single entry-point for the clients with a deep knowledge of customers’ onboarding process;
- A flexible multi–asset ecosystem of platforms and trading protocols open architecture, where to transmit clients’ orders and be fully transparent for clients;
- A balance of high-touch and low-touch execution strategies;
- An integrated trade lifecycle value chain where efficiency and cost rationalisation can be realised through the following areas of the trade lifecycle value chain that are asset class-agnostic as: Pre-trade Analytics, Client Connectivity, Data processing, Real-time Analytics, and the Post-trade Lifecycle.
*Umberto Menconi is indebted to Biancamaria Sanna for her assistance in composing this article.
©Markets Media Europe 2021