Sell-side equities front office headcounts are leveling off from the radical reductions that followed the financial crisis. Capitals markets consultancy GreySpark expects staffing levels to plateau at roughly 70% of pre-crisis levels by 2020. Although there is some relief that the numbers are stabilizing, it could be temporary. A further wave of consolidation is possible as trading becomes more about computer science and less about business. Either way, the bottom line is there are now fewer traders to manage client business.
Inevitably, this has spurred further automation, with more orders flowing through direct market access (DMA) and algorithmic trading. It has also meant that separate specialist high- and low-touch roles are a luxury and traders increasingly have to handle both types of orders. Having different systems for care and automated orders is inefficient, especially where a trade might be under performing in low-touch and needs to be pulled into high-touch care. This convergence of operations calls for a hybrid system that can manage both types of orders in an integrated way, and without adding latency or jeopardizing performance at all.
Historically, high- and low-touch order management systems (OMSs) evolved at different times to meet different requirements. Traditional high-touch OMSs from vendors such as Fidessa and Bloomberg (Itiviti introduced a high-touch OMS in 2007) enable brokers to receive and stage orders, including block trades, and manually work them through the market to achieve clients’ goals. They are designed for screen-mediated workflows involving multiple touch points with the human trader.
Automated trading is fundamentally different and low-touch systems require different architecture, workflow and screen layouts. Speed and high volume throughput are of the essence. Orders are not staged in the system, but flow directly into an algo box and then via a smart order router (SOR) to the appropriate venue. The trader’s role is to handle only the exceptions – orders that fail pre-trade risk or compliance checks, do not transact, or do not meet key performance criteria. This requires sophisticated real-time alerting, ideally with rich search interfaces to find individual orders among thousands or even millions in the system.
The mismatch of high- and low-touch workflow and the challenge of scalability meant that banks could not simply hitch their algos onto the back of their traditional OMSs. Tier I institutions solved the problem by building specialized systems for their low-touch business in-house. Quants created the algos, while IT teams developed the operational framework to link to clients and the markets, route orders and monitor performance. Some institutions adopted third-party components where available, such as Itiviti’s UL Bridge for client connectivity.
The unique nature of custom-built systems makes them costly to maintain and upgrade, and as regulation has bitten deeper into broker IT budgets, internally developed low-touch systems have fallen behind the curve due to lack of investment and innovation.
Tier II institutions have been dragged into low-touch business by buy-side demand driven by regulation and cost considerations. Most often, they have staged their flow and routed orders to bigger brokers, using the brokers’ algos and market memberships. With constrained budgets, these institutions had little option but to coerce their high-touch OMSs into supporting these operations, with their inherent limitations inevitably leading to substandard service and performance issues that spill into the high-touch business.
Meanwhile, the underlying functionality of automated trading, including client connectivity, pre-trade risk, market gateways, order monitoring, alerts, and post-trade processing for error-free clearing and settlement, has gradually become commoditized. These functions are now essentially costs and in a commission-based business where commissions are shrinking, reducing costs becomes a priority. Brokers' competitive edge lies in their quants, algos and liquidity expertise, not in custom-built platforms. The argument for getting common low-touch functionality from third-party providers is now irresistible – especially as new fit-for-purpose hybrid high/low-touch systems emerge.
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