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Buy-Side Execution: Fad Or The Real Deal?

By Tom Kingsley of Bloomberg Tradebook recounts the successes of buy-side execution and the market forces sustaining it.
tom-kingsley-edmAfter trials in Canada, buy-side execution has increased among Australia’s superannuation funds. The challenge is for buy-side traders to keep up the pace to offer competitive best execution for their portfolio managers.
We have definitely noticed an uptick in certain markets of pension funds and superannuation funds bringing their trading in-house. These firms are evaluating their algorithms and getting more sophisticated in their electronic trading. It is a great benefit that these firms are starting to take execution in-house. Whenever you start educating traders, everyone benefits, particularly when it comes time to trade.
Now, a trader who might not have been familiar with the challenges of trading electronically, has a nuanced appreciation for opportunity costs, capturing spread, pre- and post-trade checks as well as TCA analysis. There is a learning curve for in-house traders, but because they already understand communicating trades over voice, they are hungry to learn electronic trading.
In these meetings, the first question is often what primary benchmark their desk uses. Is it trade out last or market on close? Do you participate in the auctions and take advantage of the significant liquidity in the auctions? Drilling down into their pre- and post-trade metrics helps them define how they approach a trade, which is always a benefit.
To take it a step further, when you understand their sense of urgency in executing a trade, you can help them understand much easier what algorithms are appropriate and not appropriate.
Technology, market structure decide longevity
When a trading strategy proves successful for the buy-side in Australia or in Canada, it is fair to assume the buy-side will be talking to each other about it. Whether at global conferences or informally, validation amongst peers is very common.
If something is working for a large fund, they will communicate it. If someone feels a competitor is benefiting from a certain strategy, others will try it. It seems natural that in-house trading will continue to grow.
The challenge, however, is for buy-side trading desks to compete with the sell-side in terms of technology investment. Technology is faster. Information is faster and market impact from news is quicker so the markets have changed. Asian exchanges will continue to change, continue to get lower latency environments and continue to improve their market structure.
Asian markets are likely to homogenize further because there is so much competition that opportunity costs are everywhere in the trading world. The 15 most-liquid Asian markets are already communicating much more than they ever have, whether they are competing for liquidity or looking at opportunities to cross list. There will be challenges with currency and harmonizing regulations, but Asian markets will start to look much more alike in the next few years.
The pressure is already on brokers to change with the markets. Buy-side trading desks’ ability to withstand the same pressure, adapting to the changes in structure and speed, will also shape the longevity of this in-house trading trend.
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