AXA's Coleman said he believes that technological savvy will be an essential job requirement on both sides of the Street. "On the buy side, the traders of the future will have to be technologically adept," he said. "They will farm out your job if you are not adept. On the sell side, the only guys on the sales desk who survive will be those who can act as consultants, who know how to use the Hybrid floor, algorithms, etc. ... They will need a whole new skill set."
Of course, traders on both sides of the Street also will have to adapt to Reg NMS. With the regulation's implementation on the horizon, the concept of achieving best execution was debated widely. And one tool that is helping traders measure their execution is TCA.
But what came to light at AT's Buy-Side Trading Summit is that TCA and other execution metrics play a fairly small role in helping the buy side decide which brokers should get their order flow. Rather, relationships, research and capital commitment still are important aspects of the broker/buy-side relationship.
However, most traders are increasing their use of electronic venues to ensure they are achieving best execution. Some traders default to anonymous, electronic trading whenever possible, as the risk of exposing their orders before they are completed is too great. John Wheeler, VP and director of U.S. trading at American Century Investments, noted that he sends about 70 percent of his order flow to electronic venues.
"When you run $100 billion, the information you give up with your order flow is more valuable than the execution value you give up in return," Wheeler said. "Trading is a cost; we view our role in the process as minimizing those costs as much as we can. Electronic venues provide us with a cost savings of 40 to 60 percent. ... Our view is that it is a little bit irresponsible to do all of your business with the broker-dealer community."
Other traders seek more of a middle ground. Brian Williamson, VP and domestic equities trader at The Boston Company Asset Management, said his firm sends about 70 percent of its flow to brokers, as TBCAM is highly reliant upon their research.
By and large, the traders on the panel "Using Execution Metrics to Direct Order Flow" said they did not generally use TCA tools to determine to which brokers they would send order flow as much as to evaluate the performance of their own traders. "We do not view TCA as a road map as to where to send order flow," Wheeler said. "We look at it as a report card on how we have done in the past."
Ultimately, the trading process is more convoluted than proponents of TCA would suggest, and relationships still dominate order-flow allocation. Despite the increasing presence in the market of execution metrics, the panelists said they tended to make decisions about which brokers to use based on research provision and the level of capital commitment provided to complete a trade, capabilities that always have been the hallmark of principal brokers.
To visit our photo gallery from the event. Dates for next year's event will be posted soon.