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Exchange Magazine

The Conversation: The evolving relationship between buy-side and sell-side traders

Despite growth of trading technologies, the role and expertise of the sales trader in fixed-income and equity trading desks is still critical to serving clients, whether they prefer high-touch or low-touch trading services. And competitive pressures, market realities and customer requirements all play a role in the service models firms adopt and employ. Phil DeFrancesco, Thomson Reuters global head of Equities Desktop, and Kevin McPartland, Greenwich Associates head of research for market structure and technology, talk about the trends and how the human touch is as important as ever.

EXCHANGE: Sales desks are leveraging technology not only to help clients trade but also to better understand their customers’ portfolios, trading habits and profitability. Is this a significant change?

KEVIN MCPARTLAND: It is human nature when doing something complicated or important to want to talk to somebody and/or get advice from an expert. The economics of the business have changed and the tools available to both the investor and sell-side sales desk have dramatically changed, but that human part hasn’t.

For all the focus on high-speed trading and algorithmic execution, our research shows that over half of client flow is still done through a phone call. Now, of course, in the end, the brokers take those orders and put them into an algorithm to execute. But from the client’s viewpoint, it is all very human and magical.

EXCHANGE: Phil, what’s your insight into how firms will continue to offer the right level of “touch” to their customers?

PHIL DEFRANCESCO: What’s interesting from the buy-side’s perspective is what’s best for them clearly depends on the type of investor that you’re dealing with.

If you include everybody from corporate treasurer, insurance companies to asset managers and hedge funds, there are so many different flavors with different needs and wants based on turnover, product complexity, active/passive, etc. So, it’s not a one-size- fits-all. If you were to ask the buy-side how they would like to be covered, most smaller firms would say “one touch” is best, and the larger firms mostly prefer to still have multiple points of contact based on expertise.

On the sales side there’s been enormous change and cost pressure – they prefer not to give ultrahigh-touch coverage to smaller accounts anymore, as they just don’t have the resources to do so. There’s just not enough return on equity to justify dedicating multiple sales traders to an account. However, some of the smaller firms are more complex and need more expertise than some of the bigger guys. Because of this, using a blanket approach of giving smaller buy-side firms a single point of contact, and the larger buy-sides multiple points of contact, may not be what’s best for their client. The sell-side has to approach their allocation of resources by better understanding their clients’ needs, by leaning on technology and performing a deeper analysis of their clients.

EXCHANGE: Do you end up with a multilevel commission structure as everybody figures this out? How much low touch, how much high touch, human, full service … can it evolve to an à la carte menu of the things you want and need?

MCPARTLAND: I think both sides are analyzing each other more – and more quantitatively – than they used to. The sell-side understands clients and their respective profitability better. And the buy-side, through the broker vote process and Transaction Cost Analysis (TCA), understands their counterparties more and what value they’re really providing and how much those services cost. That scrutiny is ultimately driving up the level of service the broker provides.

EXCHANGE: Are there any trends that suggest firms are getting better at managing this?

MCPARTLAND: It’s leveling out a little bit. There’s still a lot of uncertainty in Europe, and market structure change in the US but the reduction in staff, the change in business models, low interest rates, low volatility – they’ve been with us for quite awhile now, and it feels like most of the major participants have done what they needed to do to adjust and to deal with the new normal.

DEFRANCESCO: It is, “okay, this is what we’ve got to work with. Let’s figure out how to do it.” The sell-side desks are smaller. It’s harder to service all of their customers in this new environment the way that they used to. Clients are expecting a lot more from you even though they’re paying you less.

MCPARTLAND: I think you’re starting to see improvements where people are collecting more data. They’re analyzing it better. This data says that this customer is more profitable and we should call them more or something happened on the other side of the world that affects the portfolio, that we really should have given them a heads-up.

DEFRANCESCO: At the end of the day, the buy-sides have to accept this new norm, and the sell-sides have to lean on technology more and ensure they have the right people in place. Having the right “one touch” trader on the other end of the phone makes a world of difference and puts the buy-side trader at ease. It is important to note that even though a client is receiving “one touch” coverage, or a single point of contact, that the other parts of the firm are available for the client when more specialization is required. To me, Amazon is a good analogy – everyone can order their whole life on there. But you actually can still get somebody to talk to if you have a problem, and they respond immediately. You don’t use it very much, but when you do, it’s there and it’s good. So, you keep coming back.

So, for the buy-side firms receiving “one touch” coverage, if something goes wrong, they still want to feel like they have somebody on the other end that they trust that will help them get through it. And that’s never going to change.


Meet the interviewees


phil-defrancesco-headshotPhil DeFrancesco
is the global head of Equities Desktop at Thomson Reuters, where his main focus is on the strategic growth of Eikon. Prior to joining us in 2013, he was at Millennium Partners for 10+ years where he was the head of US Trading. Prior to Millennium, he worked on the international trading desks at Merrill Lynch and Zurich Scudder.
 

Kevin McPartland

Kevin McPartland leads Greenwich Associates market structure and technology research and has nearly 15 years of capital markets industry experience with a deep expertise in OTC derivatives and financial services technology. Prior to joining the firm, McPartland was with BlackRock, where he was a director in the Electronic Trading and Market Structure group. Prior to joining BlackRock, he was a Principal at TABB Group, where he founded and led the firm’s Fixed- Income research practice. McPartland also spent time at JPMorgan, UBS and Deutsche Bank in varying capacities.


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