Capture the Order Flow

Posted by Clearpool on Jan 11, 2017 3:53:03 PM

Algorithmic Management Systems enable broker-dealers to solidify buy side relationships and capture order flow. For the last several years, the buy side has been shifting their trading flows from the bulge-bracket firms...

For the last several years, the buy side has been shifting their trading flows from the bulge-bracket firms to other broker-dealers. Back in 2007, nine bulge-bracket firms captured 78% of clients’ flows, whereas that amount has shrunk to 60% today, according to a recent survey by Greenwich Associates. We believe this trend will continue for brokers. Those who can consistently provide better quality execution, customize routing and execution protocols, and enable performance transparency with advanced venue analysis stand to benefit the most from this shift in order flow.

Mid-sized or regional broker-dealers has grown to 28% of commission flows, compared to just 11% nine years ago.[1]

One potential barrier that stands in the way of shifting order flow is the pervasive doubt that broker-dealers can consistently deliver the same level of execution quality as bulge-bracket firms. Ultimately, if the execution quality does not improve amongst brokers, the buy side may revert back to sending their order flow to the bulge-bracket firms as a last resort.

To prevent this from happening, broker-dealers must recognize and act on the opportunities and the challenges these trends represent, because buy side firms are narrowing the pool of broker-dealers with whom they are partnering. They are placing a premium on a few factors. Research, corporate access and sales service continue to be of primary importance despite unbundling. Stability is also a key attribute because they have grown weary of significant turnover that disrupts their relationships. But more and more, firms want to partner with broker-dealers that take the time to understand their needs and the way they trade.

47% of traders interviewed expect to cutback the share of commissions they allocate to at least one of their brokers.[2]

Successfully understanding the particular needs of a buy side client requires sector domain expertise combined with an execution offering that can truly leverage the broker-dealer’s knowledge. A broker-dealer’s unique value proposition relies heavily on having trading technology that is differentiated from the bulge-bracket firms and other competitors. It means being able to deliver insights and customizable tools to collaborate effectively, eliminate bias, achieve transparency and ultimately attain better quality executions.

Today, too many broker-dealers use white-labeled solutions offered by the bulge-bracket firms because they do not have the expertise or resources to build their own sophisticated technology platforms. But bulge-bracket firms’ white-labeled solutions typically do not have the same feature/functionality and capabilities as the systems they use in house, and the ability for customization is limited.

That is why we believe a holistic Algorithmic Management System (AMS) is a differentiator and also addresses many of the structural issues prevalent in today’s market. The Clearpool AMS is cloud-based, broker neutral and conflict free, and it offers the flexibility to customize and measure a trading experience according to each individual buy side client’s needs. It has configurable algorithmic trading tools, trade analytics and insights, and we offer a high level of “human” service.

In a world where trading algorithms are considered commoditized, the human touch

can be a differentiator.[3]

A holistic AMS facilitates the collaboration between the buy side and sell side by giving buy side customers control over their processes with respect to their routing and execution protocol. It empowers the sell side to configure client-specific trading experiences and assess the execution quality and performance of their algorithmic strategies. In addition, algorithmic strategies can be optimized with a few clicks, without having to do complex coding. As a result, the buy side and sell side can re-engage in a dialogue around the color in the market and venue analysis in real time – something that has been sorely lacking with the adoption of electronic trading.  

To continue to capture the flow from the bulge-bracket firms, broker-dealers must obtain the power to level the playing field for quality execution. With the ClearPool AMS broker-dealers can leverage the control and transparency it provides to complement their top-notch research, superior service and stable workforce to retain their existing order flow and win new flow in the years to come.

[1] Stryker, David. Up for Grabs: Money in Motion in U.S. Equities.” Greenwich Associates. Q3 2016.

[2] Ibid.

[3] Johnson, Richard. “Flat E-Trading Volumes in U.S. Equities Mask Increase Among Larger Accounts.” Greenwich Associates. Q3 2016.

Topics: Financial Markets

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