The RCM Experience
FG: What trends are you seeing among your brokers? How do you gauge your broker’s technology offerings?
KR: One positive development I have seen is the realization by some larger brokers who had previously rejected participation in alternative trading venues, now, to change their stance. As many of these brokers have decent market share they thought they would have more to lose than gain by opening up to reciprocal broker pools. That mindset is changing a bit and some of these stalwarts have done an about-face. A related development is the brokers’ willingness to invest in the technology to connect to alternative liquidity sources.
Another trend is for opt in/opt out of interacting with certain types of flow. While imperfect, it is a start at reducing the chances of getting gamed. SOR and dark pools should help to alleviate market impact instead of create it. But there is one area where there might be a concern and that is gaming. There is the chance of a large block sitting in a dark pool and someone coming in and discovering it through ‘pinging’ much smaller amounts.
Anti-gaming preferences, such as being able to choose which participants you allow your broker to interact with, help to ensure that this does not happen. For instance, a long-only client can select to only cross with other long-only, ‘natural’ flow, or choose to include or exclude, for example, hedge funds, stat arb clients, HFT clients or internal broker prop flow. Brokers are able to provide clients significant details of their algos’ development and operations.
Development of post-trade execution reports and TCA monitoring statistics are also on the upswing. Unfortunately there is not much standardization in reporting the cost of trading and the broker’s calculation ofsavings. Think of going into a shop, seeing something priced at a thousand dollars and being told at the register that the items are 30% off. You feel good that you have still got $300 bucks in your pocket, but it is important to remember you have just spent $700.
FG: Are markets only going one direction with technology and automation?
KR: Certainly not, the role of a good sales trader will be here for years to come. Block trading desks, with all their learned knowledge of who owns the stock and who may be interested in trading is something that the buy-side will be happy to use. It is hard to trump experienced brokers and trusted relationships with technology alone.