Wednesday, September 9, 2020 Stamford, CT USA — Despite fears that electronic trading will eliminate jobs on buy-side trading desks, recent investments in technology have not come at the expense of traders. Rather, buy-side institutions are using enhanced, integrated technology platforms to expand the reach of their human traders.
The average number of traders on buy-side trading desks was essentially unchanged from 2018 to 2019 at 8 in fixed income, roughly 7.5 in equities and approximately 6 in FX.
“Fixed-income electronification over the past five years—and the $1.25 million spent by the typical buy side firm last year on fixed-income technology alone—has proved to be less about removing human traders and more about increasing the capacity of those currently in place,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology group and author of The Fixed-Income Trading System Evolution: Creating Something Completely New.
The Complexities of the Trading Desk
As the world becomes more complex, so too has the job of the buy-side trader. Many are seeing their responsibilities grow and expand into new areas/products – especially in this current work-from-home environment - and most are trading more than one asset class or product. For example, 47% of fixed-income traders are also trading derivatives, 26% FX and 20% ETFs. Equity traders are even more diverse, with 60% of cash equity traders also trading ETFs, 45% derivatives, 35% FX and 21% fixed income. Traders in past years have reported spending more time on compliance interactions and transaction cost analysis.
At the same time, buy side trading desk budgets remain tight, especially given current market uncertainty. Nearly 60% of the average buy-side fixed-income trading desk budget is spent on trader compensation. For smaller hedge funds, that number jumps to nearly 80%. Improving execution quality can yield meaningful cost savings as well. For instance, every 1 bps improvement in price on the roughly $20 billion of investment-grade bonds traded each day equates to $4 million in savings—or just over $1 billion annually. The opportunity is much higher in less liquid OTC products, such as high-yield corporate bonds, emerging market debt and structured credit.
But developments in order and execution management technology have provided the leverage these desks need to gain an edge going forward. “Today, firms can use tightly integrated enterprise trading technology that allows buy-side trading desks to trade more, achieve better executions and do it at lower cost,” says Kevin McPartland. Given the current pressure on hedge fund fees and performance as compared to passively managed funds, reducing costs while increasing efficiency and execution quality is more important than ever.