As the ‘commoditization’ of algorithms continues, buy-side traders who use these electronic trading tools are dissatisfied.
Only 7% of buy-side traders are happy with their standard algorithms provided by their brokers, according to new research from market consultancy Greenwich Associates. In a report, Greenwich reported that traders increasingly want a more bespoke or customized electronic trading solution that more closely resembles their trading style and the order types they send or use.
Richard Johnson, vice president in Greenwich Associates’ market structure and technology group and author of the report, said that traders are ever more focused on transparency and customization and expect their sell-side coverage to provide expertise in market structure and the regulatory landscape.
Johnson said the report is intended to examine how institutional trading desks are using these electronic trading tools and allocating their flows. He canvassed 31 head traders who said they are demanding a new level of control and transparency over their order flow, even when routing via their high-touch sales trader.
It is becoming increasingly important to buy-side trader that they can customize algos and risk controls, and manage access to venues when executing-through algos and high-touch trades alike, Johnson said.
Market wide statistics report that upwards of 80% of buy-side order flow is ultimately handled by algorithms.
Given the buy-sides collective dissatisfaction with the broker-provided tools, they are increasingly executing more via algos away from their top three brokers as they seek superior trading performance and greater levels of control and transparency for their clients. This can open the playing field of business to other, likely smaller brokers and vendors who can more quickly create new algorithms or modify existing ones to traders needs.
Furthermore, as the buy side takes more control over order routing, the nature of the buy-side/sell-side relationship will continue to change, Johnson added. The buy side, he argued, and confirmed anecdotally by Traders Magazine, has been shifting more of their flow away from bulge-bracket brokers to midsize and regional brokers, and they are more willing to spread their electronic flow among a greater number of brokers.
A whopping 87% of the buy-side traders participating in the Greenwich Associates study cited various circumstances under which they would route more electronic flow to non-bulge-bracket brokers.
In this zero-sum game, brokers who can demonstrate superior trading performance and domain expertise while providing control, customization and transparency around routing will be in a strong position to win business, Johnson said.
