For all the headlines they generate, you could be forgiven for thinking computer “algos” had taken over equity markets. Not so. It is far from over for human traders.
A combination of weak trading volumes and financial markets’ increasing complexity is spurring a return to old-fashioned telephone broking as market guides for asset managers trying to execute large orders.
Banks and brokers say they are responding to demands from asset managers for sources of liquidity in the market.
Richard Heyes, head of equities in Asia at Citi, said that getting larger trades had become extremely challenging. “The potential impact of a large order has become quite significant – the liquidity is just not there. There is a return to old-style voice-broking, where there is trust and liquidity.”
It marks a significant change from a decade ago when new regulation in the US and Europe opened up exchanges to electronic competition. The resulting arms race of speed and technology cut margins on trades dramatically, leaving many to proclaim “the death of the sales trader.”
Sophisticated algorithms have come to dominate most daily trading on equity markets, as chronicled by US author Michael Lewis in his book “Flash Boys” earlier this year. But placing large orders on exchanges, where prices are posted in advance of deals being struck, runs the risk that it sends a signal to investors and moves the market against the deal.
Liquidnet, the global agency broker which specialises in blocks of trades between two institutions, has enjoyed record volumes in equities trading on its platforms in Europe and Asia so far this year.
In the first half in Europe it traded $66.1bn worth of European shares, a 40 per cent increase on its previous best in the first half of 2009. Its platforms in Thailand, the Philippines and Malaysia grew on average by 86 per cent year-on-year in July.
Data compiled by Bloomberg TradeBook in June suggests that block trading – defined under New York Stock Exchange rules as at least 10,000 shares or $200,000 – has been inching higher since the financial crisis of 2008. About a quarter of NYSE’s volume is via block trading, it found.
That trend is evident in Asia, too. Derek McCabe, head of dealing at Aberdeen Asset Management in Singapore, says the main attraction is the knowledge that “you have buyside asset managers [there] so there should be genuine orders on the back of that. We’re confident, therefore, that there isn’t likely to be information leakage and opening up an order to a local broker.”
However, Greenwich Associates estimates that old-style “high touch” trading has held up in spite of the rush towards electronification. According to the consultancy, around 55 per cent of US equity trading volume passes through the hands of broker sales traders and is flat on 2010 levels.
But Greenwich argues that institutional investors have been expecting more in return. They want advice from a professional who understands how the market works and can act as a guide, argues Kevin McPartland, head of research for market structure and technology at Greenwich. “Just knowing your clients’ kids’ names and having Yankees tickets isn’t enough any more.”
Others worry that if there is one point of contact between the client and broker, the broker will then know an investor’s intentions before trading. Under an electronic system, an order is routed directly to the trading venue.
“Institutional investors are concerned that [offering high-touch and low-touch services] may also be open to compromising the quality of services offered and, more worryingly, anonymity and therefore abuse,” says Arjun Singh-Muchelle, senior adviser, regulatory affairs at the Investment Management Association, a UK-based trade association.
