The New Electronic Broker
J.P. Morgan ‘s Frank Troise sat down with FIXGlobal to chart the expansion of electronic trading tools available to the buy-side and point out which new tools will make the difference in the months to come.
In what way has the trader’s desktop improved?
Over the last few years, the biggest improvements have been the inclusion of more multi-asset class execution capabilities and the inclusion of additional analytics. Desktop trading platforms that support equities options, futures and FX trading, with the ability to track all of those orders in the market and give aggregated profit and loss are much more prevalent. More trader desktops incorporate pre-trade analytics measures, such as market impact estimates as well as post-trade execution information.
What do your clients say they want most from their analytics?
Clients want a combination of real-time and post-trade analytics. Prior to starting the trade, clients want tools that help their investment decision process. Once an investment decision is made, pre-trade market impact and trade scheduling tools can help traders develop an implementation game plan. Through the course of the trade, clients like to see real-time analytics that can help them improve the performance of their trade; for example, abnormalities around volatilities and volumes. Post-trade, clients want performanc reports measuring actual execution costs against various benchmarks on a daily, monthly, and quarterly basis.
How does putting so much technology in the hands of the trader change the role of the broker? How does the broker add value in addition to the electronic tools?
In the electronic broker business, our value added comes in our role as execution consultant and our ability to educate clients on the use of pre- and post-trade analytics and execution tools. I look at the roles and responsibilities of the people on our electronic client trading desk as helping clients implement their investment ideas. When a client has a trade to execute, it is up to our team to educate that client on the tools they can use to put together a plan, present them with the tools to execute the trade and while they are executing the trade, provide information that can be used to improve their plan throughout the execution period.
After the trade is executed, we work with clients to evaluate how well they did against their plan and help them improve their trading process in the future. We focus on creating and enhancing client products continuously. Our goal is to make it easy for them to use analytics and execution tools to achieve best execution. The better we understand a client’s goals and objectives the more we can collaborate with the client on custom solutions and training.
Electronic trading products are very different from traditional equities execution capabilities. A key differentiating characteristic is that the products reside and are used by the client at the client site. In the traditional model virtually no broker technology oriented product existed at the client site.
The communication mechanism for order delivery was the telephone and execution occurred in the broker/ dealer environment. Electronic brokering is a very intrusive business. Our products exist in the client’s technology infrastructure. This has led to changing core competencies of brokerage firms. We now have to be experts at delivering products into the client site. This has implications on training and technology integration.
How does the electronic broker assist clients in locating liquidity, either through tools or the consulting process?
Liquidity has and continues to be a top priority for clients. They have always come to brokers to find liquidity in as ‘quiet’ a way as possible. In today’s landscape, much of that liquidity exists in electronic form and is fragmented. The result has been a proliferation of tools (e.g., algos, routers) that help clients navigate liquidity pools to logically consolidate the fragmented liquidity. To assist in that process we have created a pool to concentrate order flow across various trading desks, retail segments of the broader J.P. Morgan Chase organization, transition management flow, and third party broker dealer flow. I refer to it as a centralized electronic merchandise hub.
Additionally, we have spent a significant amount of time adding quant personnel to our algorithmic trading effort. Seeking liquidity and trading at fair value in a world of electronic liquidity provision is a challenge. We have personnel on our team that have experience building high frequency trading models. Our team has implemented electronic market making models in our algorithms to assist in determining optimal trading opportunities in various liquidity pools. The ultimate role of the broker is to optimally manage access to various liquidity pools: in-house, third party private pools, and public exchanges/venues. Best execution relies on the optimal use of traditional and electronic execution tools to access liquidity.
On the electronic side, it is our duty as a broker to deliver high content algorithms, smart routers, and liquidity pool access to our clients via their desktop of choice. Ultimately, the business always reverts to optimal liquidity access.
Are you seeing traders including proactive risk management into their desktops?
Over the past few years I have seen buy-side trading desks employ more pre-trade risk controls into their OMS and EMS. On the broker side, since the May 2010 Flash Crash in the US there has been much more attention to risk management as it pertains to market access. The Flash Crash highlighted cracks in US market structure but also sent a message to brokers around their deployment of sponsored and naked sponsored access and their algorithmic trading strategies pricing models and order type usage.
How is this space maturing?
Compared to a few years ago, clients have a much better understanding of what they are trying to achieve with electronic execution. They have become much more aware of the various liquidity pools and providers in the market. Algo trading is a good example. If you go back three to five years, clients would take broker algorithm suites onto their desktop and integrate the entire suite. Traders would integrate all of J.P. Morgan ‘s algorithms and the algorithms of various competitors, with the result that they had several algo strategies from each broker and a long list of drop-down menus.
What we are seeing now is traders identifying their style of execution and asking the brokers for specific algorithms according to strategy, instead of taking a broker’s entire algo suite. Clients are getting away from buying the marketing and branding of the broker and moving toward using plain language styles of execution. I believe this is a sign of a market that is maturing and better understanding of how to use the electronic execution products to find liquidity.