As we compiled this special 2008 outlook issue, there was no shortage of challenges facing the securities industry about which to write. Although we clearly segmented our coverage into specific sections -- algorithms, exchanges, dark pools, data and infrastructure, etc. -- one thing that became abundantly clear after reporting the issues was that lines no longer can be drawn to distinguish among many of these categories.
All the pieces of the puzzle in the trading process -- each of which had a specific and unique role in the past -- are starting to look and act more like each other. Exchanges are launching dark pools; ECNs (such as BATS) are trying to secure exchange licenses; exchanges are going cross-asset and global rather than focusing on one product and region; the buy side is trading more like the sell side; broker-dealers are turning into consultants; traditional asset managers are behaving more like hedge funds and launching 130/30s and 120/20s; and the list goes on.
Technology obviously is behind much of this change. Today, anyone can be anything with the right tools, and that's forcing major changes in traditional roles on The Street as well as to market structure. But I wonder how far this will go until the pendulum swings back to specialization again. There obviously are some important reasons to integrate and offer many services; but there also is a downside to trying to be all things to all people.
One of the obvious complaints is that the numerous dark pools/ECNs/exchanges have fragmented the market. As everyone and their brother has added a dark pool to their list of services, blocks have become harder to execute than ever before. In addition, with the sell side racing to churn out all kinds of products for the buy side -- from algorithms to TCA tools -- in hopes of capturing their order flow, they often end up missing the point. As one buy-side trader tells Advanced Trading, many times sell-side firms are so busy pitching their many products to solve his problems that they're too busy to actually listen to what his problem is.
Lastly, having access to new technology can be a double-edged sword. Buy-side traders are under pressure to master every new trading tool on the market, understand how each algorithm works, and even learn how to start trading internationally, manage risk using derivatives and dabble in hedge-fund-type trading. Their jobs are rapidly changing and it isn't always easy to keep up.
As this is occuring, I'm hearing a rise of voices praising the boutique firms that actually are listening and, surprisingly in this highly electronic world, are focused more on the human touch -- hearing and understanding problems, and offering one-on-one attention. Maybe the pendulum already has started to swing?