Tuesday, January 24, 2017 Stamford, CT USA — Buy-side traders are executing more equity electronic trading business away from their top three brokers as they seek superior trading performance and greater levels of control and transparency for their clients.

Market structure evolution over the last 10 years has profoundly changed equity markets, creating a complex web of exchanges, ATS’s and dark pools. Navigating today’s market would be effectively impossible without trading algorithms and smart-order routers. Consequently, approximately 80% of buy-side order flow is ultimately handled by these tools.

A new report from Greenwich Associates Control and Transparency: How the Buy Side Seeks to Manage Their Broker Network, examines how institutional trading desks are using these tool and allocating their flows. The 31 head traders participating in the study say they are demanding a new level of control and transparency over their order flow, even when routing via their high touch sales trader.

For these institutions, only 7% of traders are happy with the standard algos provided by their broker , as traders increasingly feel that the algos they use should be customized to suit their orders and trading style. 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. 

“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,” says Richard Johnson, Vice President in Greenwich Associates Market Structure and Technology group. 

Winners and Losers
As the buy side takes more control over order routing, the nature of the buy-side/sell-side relationship will continue to change. The buy side 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. Eighty-seven percent of the buy-side traders participating in the new 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,” says Richard Johnson.