U.S. Equity Brokers Merging Sales Trading and Execution Consultancy
The walls between electronic trading and high touch execution are starting to crumble as growing numbers of U.S. institutional equity investors accept coverage from a single sell-side sales trader for both e-trades and traditional block trades.
Since the start of the e-trading era, institutions have insisted that the two execution channels remain separate and that specialists who monitor their algorithmic trading be distinct from the experts who manage their block orders. The primary reason for this divide: Investors were concerned about information “leakage” and saw this hard separation as key to preserving their anonymity.
However, a new Greenwich Associates report, Blurred Lines: Sales Traders Drift Toward Execution Consultancy, shows that a majority of the more than 300 U.S. institutional equity investors participating in the study are now willing to accept single coverage across high-touch and electronic trades. Only a declining 31% of the institutional investors participating in annual Greenwich Associates U.S. Equity Investors Study still prefer separate coverage.
Two main changes are driving this shift:
- As market structure becomes more complex and trading venues and tools proliferate, investors are deciding that the value of high quality execution consultancy—or advice on how, where and when to execute a trade—outweighs the risk of information leakage.
- Headcount reductions on sell-side trading desks have led many brokers to consolidate the roles of sales trader and execution consultant.
Since most institutions execute half of their electronic trading volume through their lead broker and nearly 85% through their top three brokers, investors have formed strong relationships with these firms, and sales traders have developed a deep understanding of their clients’ needs and preferences.
“So in many cases, investors have found that what started as a cost-cutting move by their brokers hasn’t resulted in negative consequences in terms of information leakage or diminished service quality, but has instead produced a model of comprehensive coverage that provides them with valuable execution consulting,” says Craig Viani, Greenwich Associates Vice President of Market Structure and Technology.
Greenwich Associates expects this consolidation trend to continue as the jobs of buy-side traders continue becoming more difficult and complicated and investors recognize the increasing value of execution consulting and other sell-side advisory services. Among the more than 300 institutions Greenwich Associates interviewed in 2015 as part of its annual study, the quality of execution consultancy saw the greatest increase in importance as a criterion for e-trading among buy-side traders.