By Michael Mollemans, Head of Global Market Structure & Analytics, Pavilion Global Markets
Markets in Financial Instruments Directive (MiFID II) regulation and best execution reporting requirements necessitate increased use of automation and algorithms (algos). However, the traditional “low touch” service approach is no longer an option when the goal is to achieve the highest possible ranking on a client’s execution performance scorecard. Automation and investment in trade process technology create efficiencies that support the sell-side’s efforts to provide clients with “high touch” services at “low touch” rates, together with all the block liquidity access, service guarantees and analytics clients expect from their customized service partnerships.
AUTOMATION AND TECHNOLOGY
Trade process automation starts with the order and execution management system (OEMS).
A robust application with the ability to process large amounts of order and execution data across global markets with speed and efficiency is no longer enough.
Increasingly, sell-side OEMS systems are being assigned tasks that were previously done manually by sales traders. Performance monitoring and alert functionalities are continually being built into OEMS applications to automate streamlined procedures in an effort to help sales traders stay ahead of the curve with proactive status updates and client notifications relating to suspicious order or execution messages. The OEMS build-out is a reflection of a firm’s attention to detail and is a testament to the collaborative efforts between the sales trading team and the product development team.
Block liquidity access is often cited by the buy-side as one of the main qualitative factors considered when making broker routing decisions. Automation in the indication of interest (IOI) communication process replaces the traditional manual approach to accessing block cross opportunities and prevents information leakage by hard-coding client specific restrictions and preferences. Sales traders using “smart IOI” applications can instantly batch process hundreds of lines in the OEMS and create special alerts for buy-side traders on the IOIs that match their stock holdings lists, or interest lists. The efficiencies gained through the continual build-out of sales trading functions into processes and applications allows sales traders to spend more time providing value-added “high touch” services.
Settlement efficiency is weighted highly among the qualitative factors included in client execution performance scorecards. Streamlined and automated end-to-end workflow processes straight from the OEMS to the middle- and back-office applications is what makes it possible to process trades over global markets quickly and efficiently. Shared systems and cross-coverage between Asia, EMEA and Americas teams allows clients to experience truly uninterrupted 24-hour support and updates on orders and settlement processes, with the end goal being the delivery of a consistently reliable trade and settlement experience.
CUSTOMIZED SERVICE PARTNERSHIP
Buy-side traders are asking for “high touch” service when they route orders to the “low touch” algo desk. In other words, they want direct access to customized hybrid “high touch algo” service options to be made available on the strategy drop-down menu in their execution management system (EMS). Helping clients achieve best execution requires a centralized “all hands-on deck” service approach where “low touch” is gradually becoming less of an option when the goal is achieving the highest possible ranking on the client’s execution performance scorecard.
The MiFID II regulatory technical standards (RTS 28) requiring firms to publish annual best execution policy reports bring quantitative service factors into renewed focus. Access to block liquidity is a highly valued qualitative service. Liquidity is often a source of frustration for clients as it can be here today and gone tomorrow, especially in small- and mid-cap names. A few illiquid names in a “basket” or “program” can hurt overall performance numbers, and lead to higher opportunity costs on the residuals. A sales buy-side trader’s liquidity access requirements and then combine both expert advice on liquidity-seeking algos, together with access to a breadth of “upstairs” counterparty relationships, makes all the difference when aiming to achieve the best possible trading performance result.
Buy-side traders rely on their sales trader coverage to advise on both the inner workings of the algo parameter settings, as well as provide commentary on market moving news and technical analysis to help clients seize opportunities and avoid risk. Algos often use news factor data but they cannot yet compare with an experienced sales trader’s ability to take economic and geo-political events and turn them into alpha producing opportunities for clients. Sales traders are counted on to assess new technologies, like artificial intelligence or machine learning, and advise clients on where quantifiable, statistically significant, results are being seen, or to what extent it is just marketing. Clients also expect sales traders to stay updated on market structure changes and advise them on how to best position themselves to take advantage of changes in market rules, regulations, new venues and innovations that impact the liquidity landscape.
PRICE EQUIVALENCY
The unbundling of research under MiFID II brought trading costs into the limelight and, since then, the spread between “low touch” and “high touch” rates has narrowed significantly as competition intensifies and trading process efficiencies proliferate. An increasingly com- mon feature within the customized hybrid “high touch algo” service across all “high touch,” algo, port- folio, block, etc execution services.
Clients appreciate the cost savings that come from the “low touch” algo desk approach. However, the regulatory requirement to take “all sufficient steps” to achieve best execution, consid- ering quantitative and qualitative factors, necessitates equal access to all sell-side desk services. Buy- side traders are asking for direct and centralized routes to all desk services with price equivalency
at the lowest available rate.
SERVICE GUARANTEE
Reliability of execution is a key qualitative factor when it comes to making broker routing decisions. Buy-side traders do not want the burden of responsibility to be put on them to assure that the variety of parameter and calibration settings in the algos are specified correctly. Implicit in the “high touch algo” service partnership is a deep knowledge of the client’s unique trading strategies and urgency levels across different market conditions, and assurances that algo settings will achieve the client’s desired trading outcome. This knowledge acts as an insurance policy, so to speak, by placing more of the onus on the sales trader to assure client trading strategy goals are reached at the end of the day.
In the event of algo or network failure, sales traders take on the responsibility to access back-up algo networks quickly, rather than simply asking clients to “trade away.” Market data issues, net- work outages, database failures, algo engine issues, etc. can and do happen, but the ability to fail over to a parallel back-up algo infrastructure makes all the difference when it comes to providing reliability of execution. A sales trader’s ability to provide clients with quick and detailed communication about the nature of a system failure, while migrating orders to the back-ups and returning trading processes to normal, is always appreciated.
ANALYTICS
Analytics are at the forefront of the trading relationship, with the focus on maximizing alpha through smarter execution strategies. Sell-side traders are expected to be in constant communication with clients around transaction cost analytics (TCA) and so data visualization tools are being used more and more. At the start of the day, pre-trade transaction cost estimates set strategy selection in motion. Then, real-time market data feed into technical trend analytics designed to help sales traders add alpha by capitalizing on directional opportunities through adjustments to algo parameters and tilts to the volume participation curves. Real-time analytics are value-added only if sales traders are using the data and taking action to seize intra-day opportunities in spread capture, timing contribution, etc. Deeper discussions around venue analysis help sales traders to have an informed dialogue with buy-side traders around performance at the venue level, which helps to cut through hard-coded venue biases and facilitates dynamic venue prioritization decisions and smart order routing strategies across various market conditions and levels of trade urgency.
BOTTOM LINE
Investment in technology, processes and applications designed to automate tasks that were previously done manually create efficiencies that allow sales traders to focus on the qualitative value-added side of trading services. With a goal of forming customized hybrid “high touch algo” service partnerships, which is embedded in Pavilion Global Markets’ value proposition, buy-side traders gain direct access to all desk service options on the strategy drop-down menu in their EMS, with price equivalency across all “high touch,”“low touch,” block, portfolio, algo desk execution services. Implicit in the service partnership is a deep knowledge of the client’s strategies and algo setting preferences, which acts as a service guarantee that the desired execution outcome will be reached at the end of the day. Analytics is at the front-and-center of the service partnership as constant communication around TCA generates a feedback loop that helps produce performance results through fine-tuned algo parameter settings, smarter execution strategies, and unbiased venue routing preferences.
