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FLASHBACK FRIDAY: Sales Traders Get Into Position
Traders Magazine Online News, July 26, 2019
In this age of artificial intelligence, machine learning, algorithms and smart order routing, how does a sales trader prove his worth, let alone his salary?
Over the last several years trading desks have shrunk, technology has replaced many humans by virtue of cost and efficiency. So much so, that some firms have had to reinvent themselves as technology firms to survive independently, merge with others or disappear altogether. The last nine years haven’t been kind to the brokerage industry. Traders Magazine pondered the question 'how does a sales trader survive?' nine years ago - and it remains a tipic these days. Just ask a sales trader.
“Sometimes it’s a struggle to stay in the game, get a trade done and make the firm money – consistently,” said one sales trader in New York. “The buyside says they love us and need us but yet getting them to pay for us is a completely different story.”
U.S. equity brokerage commissions remain depressed and fell in 2018, the last year Traders Magazine had access to data, marking the eighth straight year of falling profits. Traders both on the sell-side and buy-side are not surprised as the underlying fundamentals surrounding trading haven’t changed much since 2009 – lower volumes, low volatility, more low-touch or electronic trading versus high-touch methods and a reduced spend on research.
In what was once hoped would be a short-term slump in commissions has become a more prolonged depression. It truly isn’t a good time to a broker these days.
In its 2018 report, Greenwich Associates reported that U.S. equity commission payments from institutional investors to brokers have fallen a whopping 45% from their peak levels. Those numbers from the Greenwich Associates 2018 U.S. Equity Investors Study illustrate the difficult environment faced by U.S. equity brokers.
So, how can a broker stay employed and get into position in an equity electronic trading business that tectonically shifted from human- to machine-driven in recent decades, human brokers are making a comeback of sorts. Wall Street desks that handle and route the trades of investment managers still need to be on the cutting edge of technology, but the personal touch has emerged as a differentiating factor in leveraging that technology stack to achieve the most efficient execution.
“Customization has come back into fashion,” said Mark Louka, Executive Director, Systematic Trading for J.P. Morgan Asset Management, which manages about $2 trillion. “It allows us to very quickly do things with partners who do a lot of good things on their own, but don’t necessarily do exactly what we want. It allows us to quickly build what we want, and leverage partners’ technology in doing so.”
Many trades that went ‘low touch’ years ago are staying that way — a broker probably won’t be any better than an algo at managing a small purchase of a liquid stock. It’s the off-the-beaten-path buys and sells — the large institutional transactions, sometimes with specialized instructions, in less liquid securities — that need finesse and collaboration.
But the brokers (and remaining sales traders) are trying to stay ahead of the curve.
“We do a lot more customization and bespoke work, to understand the customer’s intraday and multi-day trade profiles and try to engineer the best outcome for the client,” said Todd Lopez, Head of Americas Cash Equities at investment bank UBS. “We are applying a high-touch type of service to what has historically been a low-touch product. People still make a difference in this business.”
Men and women traders’ raison d’être addresses the core challenge of institutional investors, i.e. quietly finding counterparties for outsized trades. That task has been complicated in recent years by fragmented liquidity due to a steady increase in the number of exchanges and trading venues.
There’s no going back to the simpler times when the NYSE-Nasdaq duopoly was the only game in town: just this past May, the U.S. Securities and Exchange Commission approved The Long-Term Stock Exchange as the 14th U.S. equity exchange. That’s in addition to dozens of active off-exchange trading venues, each with their own protocols, order types and unique strengths and weaknesses.
“As the marketplace gets more complex with a growing number of alternative sources of liquidity, how do we access this liquidity in a manner that benefits the end client?” said Peter Sheridan, Head of Electronic Trading , Americas at UBS. “To this end we are seeing more large asset managers partner up with high-touch sales traders, who have the skill set to put together a block transaction in a way that might not happen in an automated fashion by combining technology solutions with a human touch.”
Neither high touch nor low touch trading is going away, nor are the two functions merging. But market participants note some convergence. “They are still distinct channels, albeit expectations from clients are evolving, and they’re becoming more similar over time,” Lopez said. “For example the low-touch world is starting to offer principal liquidity in the workflow, and the high-touch desk is becoming increasingly proficient in leveraging low-touch strategies.”
And Greenwich, who yearly brings the news regarding commission spend and consequently can often be the bearer of depressing news for the brokers on one hand, is quick to try to help them. In a new report from “Money in Motion: How the Sell Side Can Differentiate and Win Market Share,” finds that 59% of institutional commission payments to U.S. equity brokers are not tied to research or advisory services. And this is where brokers and sales traders can prove their worth.
“Unbundling rules originating in Europe and the corresponding proliferation of commission-sharing agreements have enabled North American asset managers to take more direct control of their execution flow with a focus on best execution,” said Richard Johnson, Principal for Greenwich Associates Market Structure and Technology and author of the new report.
To have a shot at this business, brokers must first excel at sourcing natural liquidity. This new Greenwich Report provides a detailed analysis of the factors buy-side traders take into account in assessing and comparing a broker’s ability to generate natural liquidity.
The next biggest drivers of buy-side trade flows are the overall relationship between a buy-side trader and the institution, and brokers’ coverage and “high-touch” service. Together these factors represent almost 60% of the value institutional trading desks derive from their brokers.
“Interestingly, buy side traders tell us a broker’s brand is a not a big driver,” Johnson said. “This might dismay the marketing department at bulge-bracket brokers but should be a sign of encouragement for smaller shops.”
As asset managers become more data-driven in their analysis of execution quality, they are reallocating order flows among their broker-dealer relationships at a faster pace.
That finding provided the context for a recent Greenwich Associates webinar “Best Execution: How the Buy Side Measures it, How the Sell Side Produces it.” Panelists discussed the causal relationship between quantitative tools, execution quality and the reallocation of order flow among broker-dealers.
“As the quality of the tools the buy side uses to analyze their executions has increased in sophistication, it’s also driving the increase in the speed with which they reallocate flow,” said Ken Monahan, senior analyst on the market structure and technology team at Greenwich Associates.
Based on decades of data on peered relationships, Greenwich examined how the buy side reallocated their flows across two time periods, 2013 to 2014 and 2017 to 2018, and plotted the distribution of changes over time.
It found that reallocations per broker-dealer are quite high. For the median firm, the absolute reallocation per broker-dealer moved from 22% in the 2013-2014 period to 36% in the 2017-2018 period. “So, the median firm was reallocating a third of its flow per relationship in one year,” said Monahan.
In a live poll, more than half (or 54%) of webinar attendees said that the use of technology to better analyze execution quality is what’s driving the increased propensity of the buy side to reallocate flows among brokers. Meanwhile 42% said that increased attention to best execution requirements is behind the trend. Only three percent cited the sales tactics of dealers (discounting capital commitment), and one percent denied that reallocation of flow is actually changing.
The following article originally appeared in the July 2008 edition of Traders Magazine
Sales Traders Get Into Position
By James Ramage
Sales traders' roles have changed. Brokerages are asking them to do more of the trading. With this, their functions have melded more with those of position traders.
By executing trades, as well as monitoring them, the sales trader's job has become more complicated. In the process, position traders are sometimes stepping in and providing assistance.
"The roles, in many cases, are converging and becoming more complementary," says Tim Gee, managing director and head of distribution for the cash trading products at UBS. "Sales traders have increased the amount of trading they are doing directly, which opens the door and even necessitates [position] traders to reach out to clients with their rich insights and content." Gee says position traders are now more important in the client relationship, as they've become more visible and interact more with the buyside.
At Morgan Stanley, sales traders are being asked to think like position traders, and vice versa, says Michael Schaftel, who runs its U.S. sales business.Because the firm has been seeing more capital use and bigger blocks in the market, sales and position traders there need to be able to manage clients' needs and expectations by understanding all the buyside's tools, including capital, Schaftel adds.
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