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Are Derivatives Ready for Low Touch?

Traders Magazine Online News, August 3, 2018

Chris Monnery

A lot has been written about the development of Electronic Trading in Derivatives, and specifically the rise of algo usage and the evolution of the agency algo space. What we've witnessed over the past 5 years is an accelerated version of the story within Equities, albeit with different market structure, and even a different client to broker relationship. But as Larry Tabb mentioned in a recent Tabb Forum piece, we are at an inflection point. Are we truly about to see the "Equitification" of Derivatives Trading?

Maybe it's worth summarizing the different flows I'm talking about. High Touch is High Touch. We all know what it is, and conceptually, the difference between Equities and Futures is marginal. As we move to Electronic Trading, this is where things diverge. In Equities, we understand that most Electronic Trading is Low Touch. Low Touch is all about the service you as a broker provide the Buy Side, from access to liquidity, breadth of strategies, and even customization. Workflow and indeed the trading platforms in Equities have evolved to handle all these elements and provide the broker with the tools they need to differentiate their execution.

In Derivatives however, Low Touch as a concept simply doesn't exist. Electronic Trading is considered No Touch, where the broker provides the pipes, but little oversight or service beyond maybe a cursory heads up on an issue. As a Buy Side, you make your choice of provider and their service, but you own the risk. But as the algo service landscape opens up with specialist algo vendors and in-house algo platforms becoming the norm, is the Buy Side going to start to ask for more from their FCMs in terms of execution? Note that this is happening at the same time that the Buy Side is grappling with their own cost pressures, and the drive for commission $ efficiency will continue to pull flow away from the High Touch route. It does seem like the timing is right for Derivatives to move toward Low Touch, the bigger question is how will this actually work, and what challenges are in the way?

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