Back in 2012 the world was still reeling from the financial crisis and the street seemed transfixed on the future of buy-side coverage at the big banks. Just like crypto today, this dominated the headlines and opinion across conferences and the media. The prediction was that what the buy-side wanted was a single point of contact into each of their brokers and that these people needed to manage both high and low touch order flows. At face value this seemed to make sense – after all, what buy-side needs multiple contacts at a single firm? And, as a broker, why not consolidate coverage to a single person? At the same time this idea also played to the overall direction of travel related to improving efficiency.
The recent Greenwich Associates research paper on The Evolution of Equities Sell-side Execution Technology delved into this question more deeply and found that, despite the hype, the overwhelming majority of firms questioned still operate separate coverage models. So what happened?
In hindsight, the headlong enthusiasm for one-touch focused on the end goal of maximizing efficiency on the bank trading floors without acknowledging the gap that existed to get there. In other words, they failed to recognize why the high touch and low touch channels existed in the first place.
High touch is about trust. It’s about the having the client’s back; it’s about the service you add to the client-to-firm relationship; and it’s about execution. Low touch is about execution only, but it is not a case of ‘fire and forget’, far from it. As the markets have become more fragmented and new, alternative liquidity sources have appeared, the low touch trader has evolved into a new role as execution consultant.
The clear and resounding message coming from the Greenwich report was that requirements on low touch are evolving. Buy-sides are looking for more value from their low touch provider. It’s no longer sufficient to simply offer a canned suite of someone else’s algos. Service in low touch is about customization, exception handling and changing lanes between different algos as market conditions dictate. In other words, it’s about staying in front of the client’s needs.
One of the observations from the report is that, in the majority of cases, the street has moved to a model where the high touch desk is essentially seen as a client of the low touch desk. This makes sense. You don’t buy a dog and bark yourself, so why as a high touch trader would you look to manage the intricacies of an algo, or the increasing fragmentation of liquidity, when there are resources that can do that for you? This then allows you time to focus on adding value to the overall client relationship.
So was the driver behind one-touch completely misguided? In my view, no. It was an answer to a post-crisis problem of how the sell-side reduced its cost overhead. And for the buy-side, an answer to a question it hadn’t actually asked, but with shrinking wallets wasn’t in much of a position to argue about. So, given it seems that this change hasn’t materialized, does this mean one touch is dead?
I’m not so sure, maybe it’s just being redefined. Originally, one touch was about reducing the interaction to a single jack of all trades (no pun intended). Anyone at the coal face on either side would have told you this wouldn’t work, and you could expect that part of its failure was the impact of the buy-side voting with their feet.
Today, one touch redux is no longer about the single coverage person, but the relationship between the sell-side and their client at an overarching level. In the same way that people have their own preferences about their morning coffee, the buy-side will have their own view of how they want to be handled by their broker. If you opt to leverage a strategy, or blacklist a particular type of liquidity through the low touch channel, then it’s likely you’d want your high touch trader to follow suit. Maybe you want your high touch coverage to see your low touch flow, or maybe you absolutely don’t want to risk the information leakage. Perhaps you want your low touch trader to actively and anonymously seek out natural internal liquidity. All perfectly reasonable requests, but given that close to half the firms in the report still use separate technology stacks, creating that level of consistency comes with its own layer of complication.
Adding this menu of options as to how a buy-side chooses to be treated places an increased onus on the consistency and flexibility of the technology underpinning the multiple channels the client trades through. High touch and low touch are becoming more inter-operable, and the capacity for cross-channel visibility is becoming as fundamental as the high and low touch traders having the same trading capabilities.
And, just as senior management bought into the original idea of one touch as a way to maintain their competitive position from an expense perspective, the new one touch needs to receive the same level of attention, only this time with the focus on revenue. Or, to put it bluntly, offering a better service to clients. The buy-side never asked for reduced coverage and so putting the power back into their hands should be the foundation of the relationship moving forwards. Those firms that have recognized this need for consistent, inter-operable channels to market will be able to offer their clients the best choice at the best price. These are the firms that look set to win out overall.
Chris Monnery, Fidessa