WASHINGTON, D.C. — Hard times are affecting the relationship between the buyside and the sellside.
With both volumes and the commission pool depressed, the buyside faces challenges adequately compensating its brokers while brokers at the same time are restructuring their services.
That restructuring involves cutting back on the number of staffers that interact with an individual money management firm, according to executives Friday at the Security Traders Association conference on market structure here. Often that means merging the roles of the cash desk sales trader with that of the electronic desk sales trader into one individual.
While acknowledging the sellside’s revenue problems, Frank Loughlin, a senior vice president in the trading department at money manager Alliance Bernstein, told conference goers he’s still concerned about the cutbacks.
I’m not sure what the value-added proposition is when you go from multiple touch points to fewer or a single touch point,” Loughlin said. “I’m also slightly skeptical that the skillset exists on a widespread basis on the sellside to implement this at the moment.”
Justin Kane, a trader with Ranier Investment Management, shares Loughlin’s concern over skillsets.
Ranier operates a small, but busy desk that outsources a great deal of its “project” work to its brokers’ electronic desks, Kane explained at the conference. Merging those departments with the firms’ high-touch operations run by its traders could compromise the quality of its services, Kane worries.
“They’re absolutely two different skillsets,” Kane said. “You can’t work on those projects and look for natural liquidity and participate in block negotiations at the same time. You just can’t do it if it’s going to be done right.”
A major concern on the buyside when it comes to merging the cash desk with the electronic desk is the loss of anonymity.
Part of the appeal of trading with broker algorithms is the anonymity the buyside trader gets. He doesn’t have to reveal his intentions to his broker. By contrast, utilizing the talents of the block, or high-touch, desk requires divulging sensitive information.
Some on the buyside fret that a breakdown of the Chinese Wall that separates the two groups could result in information leakage. The fear: The sellside trader handling the high-touch order would be privy to details of his customer’s electronic orders.
Despite their concerns, buyside traders are still heavily reliant on the sellside. The need may not be for their own sake, however, but that of their portfolio managers. In the past few years, this need has manifested itself in the concentration of commissions with fewer larger brokers as well as a tendency to pay more for individual trades.
While data from industry consultants Greenwich Associates this year showed that total commissions declined for the third year in a row, its statistics also showed that the buyside’s blended commission rate increased for the first time ever.
According to buyside traders, the changes in their allocations reflect the need to keep their portfolio managers in the information loop. They want to ensure their portfolio managers get the first call and maintain their access to corporate executives.
