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'Color' in an Electronic Market

Traders Magazine Online News, March 31, 2017

Terry Flanagan

In a complex electronic marketplace, buy side -- sell side communication ain’t what it used to be.

The evolution of electronic markets depersonalized, to an extent, the relationship between investment managers and the brokers who buy and sell on their behalf. More recently, the fragmentation and increased complexity of the market has siloed the two sides further.

Providers of trading technology have taken note of the information gap.

Joe Wald


“As trading decisions get made, there should be real-time conversations between the buy side and the sell-side trader who is watching their trading flow,” said Joe Wald, chief executive officer of Clearpool Group. “You want there to be actionable insight so that you can not only see it, but you can do something about it. Control and transparency is built-in.”

The buy side clearly wants more from the sell side -- in a Greenwich Associates survey conducted earlier this year, just 7% of investment managers said they were happy with the standard algos provided by their brokers. Managers are increasingly looking to customize algos and risk controls, as well as manage access to venues when executing. All of that requires more granular information than is currently provided.

“While information transparency provided by the sell side to the buy side has increased in recent years, generally the information is on an ad hoc basis,” said Chris Nagy, chief executive officer at market-structure consultancy KOR Group and a 30-year Wall Street veteran. “Even then, the information usually does not allow for a complete analysis of algo/venue combinations, or comparative analysis across brokers.”

Greater transparency can help traders reduce implementation shortfall -- the difference between the decision price and the execution price -- and improve trading performance. “In the absence of effective information, it's not uncommon to see slippage occurring in double-digit basis points,” Nagy said.

Information provided to buy-side traders is generally provided after the fact, and in a format that needed some massaging to uncover the underlying value.

“Historically, there really has been no insight into the micro aspects of what goes on in the marketplace,” Wald said. “People would only see broad-based, past-dated Transaction Cost Analysis on a spreadsheet, showing what had happened versus old market data. There was no real-time insight on what's happening from a micro-structure perspective.”

New York-based Clearpool has enhanced its client portal in a way that company executives say changes the dynamic. The new dashboard embeds a series of collaborative real-time trading tools that are meant to raise the bar on dialogue between the buy side and the sell side, and improve the quantity and quality of the ‘color’ that brokers provide to clients.

The product is a bit of a paradox in that it is a new technology, but its value-add is that it turns back the clock by ‘repersonalizing’ the buy side -- sell side relationship.

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