The rise of electronic and algorithmic trading has irrevocably changed how the financial markets operate. Equity markets have been known to be almost entirely electronic since 2015. Moreover, according to Greenwich Associates, over 90% of equity flows are executed electronically in liquid, developed markets like the U.S. It’s no secret that floor trading has dwindled. Just take a look at the floor of the New York Stock Exchange. When I was a specialist, there were thousands of traders and market makers on the floor of the exchange, but in the past decade or so that number has dropped to only a few hundred.
Even though sales traders are increasingly hard-pressed to find ways to add value and differentiate themselves in our electronic world, there are still several key ways they can maintain their edge. In short, they need to become “execution consultants” in order to stand out in today’s marketplace, and to thrive and survive going into 2019 and beyond. But how to do this?
1. Lean into your established human relationships
While the volume of electronic trading continues to increase, human interaction remains extremely relevant. Individual sales traders and the relationships they build and maintain are still critical in today’s market. However, the nature of those relationships needs to change and adapt to reflect the current landscape of algorithms and automation.
At minimum, sales traders need to be able to utilize technology to collaborate with clients and to create custom solutions in order to keep these relationships relevant in 2019. But these days, sales traders can take it a step further and differentiate themselves by advising their clients on which trading venues to use and how to access them in a way that works with their trading goals so that trades get done at the right time, in the right place, at the right price.2. Turn your market knowledge into actionable insights
There is no doubt that the machines do much of the trading now. However, the value that a trader brings to the table is their knowledge of venues and order types, and consultation of various routing protocols. Successful traders will be the ones helping clients identify opportunities that other traders miss in an increasingly complex and changing trading environment.
Yes, electronic trading platforms provide speed and simplified processes. But without being monitored and customized by competent traders, the value of an electronic tool is inherently less than it could be. Execution requires a man + machine approach—the combination of the behavior of the technology selected and its ability to be customized and monitored by someone with the right institutional knowledge and critical thinking skills. That means traders need to become intimately familiar with technology and use the information gleaned from that technology to better communicate with clients.3. Adopt technology that gives you an edge
Over the next five years, the buy side will continue to demand more transparency from their brokers, but ultimately, they will be looking for a value-added partner that can assist them in achieving their objectives.
The most successful sales traders will demonstrate an understanding of this approach by utilizing tools like an algorithmic management system and venue analysis which will provide them with actionable data to analyze and optimize performance. Furthermore, having access to real-time and historical views of trades will enable informed decision making and result in better recommendations to clients about their routing protocols.4. Provide a consistent, high-quality level of service
Ultimately, using technology means sell side firms can execute trades while maintaining a high level of service. The latest trading tools allow brokers to establish relationships with their buy side clients within an electronic trading platform, allowing for sharing of strategies and order flows and more seamless collaboration. With this deep level of partnership in place, the sales trader is positioned to truly understand the goal of the buy side client and allows them to provide a higher level of service, tailored specifically to that client.
5. Deliver execution performance that achieves best ex goals
Best execution is more critical today than ever before. The buy side has high expectations for execution quality and demands clarity around order routing. Regulatory scrutiny has increased, dictating that how you arrived at best execution is just as important as showing you have achieved it. Laws such as MiFID II demonstrate that best execution is no longer simply just a box to check. Rather, traders must store, retain and be ready to show as much data as possible around the lifecycle of a trade and how decisions were made. Firms now face new standards around publishing data regarding execution quality. Simply put, firms must now demonstrate a continuous, ongoing view into how they provide best execution to their clients—and buy side firms expect this.
This demand for visibility doesn’t end just at MiFID II; this is just one example of a bevy of new regulatory statutes that seek to protect the end-user investor by requiring traders to produce data to demonstrate how they achieved best ex for their clients.
It’s a fragmented and complicated market today; but by utilizing tailored algorithms through a robust electronic trading platform that provides comprehensive data and custom configurability, sales traders can become the execution consultants their clients need and expect in the current environment. In the end, it’s about man and machine working together to make trading as effective as possible for brokers and the clients they serve.
The ability to use the right technology in the smartest way possible is how brokers will be able to successfully differentiate themselves from others in an increasingly competitive environment.