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After the Gold Rush: Challenges in Finding Liquidity for Today’s Sales Traders

By Kurt Huhner, Vice President, Business Development – Americas, Fidessa

Sales trading lends itself to one of the things that the human brain does better than any computer – pattern recognition – making the leap between potential buyers and sellers. But the role has undergone some fundamental changes over the past few years and, in today’s highly competitive markets, sales traders need to be more efficient than ever before. Technology, in particular merchandise boards and analytics, can assist in stacking the odds in a particular trader’s favour, but only if they are properly constituted and integrated with the firm’s other technology. Sales traders have always been the conduit for liquidity between buy-side firms, especially when getting large orders executed, providing market colour and searching for natural crossing opportunities. The trick, however, is in making sure this doesn’t come at the expense of information leakage, which may result in poor execution for the client.

Old ways

The first port of call for the sales trader is the firm’s internal merchandise board that shows all the stocks and quantities that can be discussed with other clients. Additionally, he will review the firm’s research and trading notes, as well as manually sourced information about his clients’ activities – shareholdings, order history and watch lists – looking for a match. Historically, he would also call the $2 brokers on the NYSE floor for additional market colour. This manual approach is not only time consuming, but also hinders the sales trader in doing what he’s really paid for – negotiating and matching between buyers and sellers.

The number of $2 brokers has greatly diminished and there are fewer sales traders covering clients. Sales traders today need better quality information – and they need it fast – in order to provide a better service to their clients and retain their business.

It is not surprising, then, that firms have sought to automate the manual processes involved in collating and presenting information that helps them find liquidity for clients. These systems must be dynamic, collect information from potentially disparate sources and provide accurate suggestions or analytics on which of their clients may be interested in a given stock. But unless this information is consolidated and integrated within their own workflows, the technology will fail to deliver on its promise.

Achieving this can be harder than it looks, because much of the information required is located on separate systems, using different technologies and different user interfaces. For example, the order management system (OMS) provides the live and historic orders, a market data terminal provides shareholder information, and maybe even watch lists. In today’s world of reduced desktop budgets and competing screen real estate space, sales traders don’t have the luxury of using multiple systems and manually trying to make sense of and identify any correlations between the data in a timely fashion. This creates the undesired ‘swivel chair’ effect that is a deal killer in today’s fast-moving markets.

Cutting through the noise

Even when all the important data is in one place, sales traders still need to make sense of it and attempt to cut through the noise, which in itself is no small task. So how do you manage all that data and still provide value to your customer in a timely fashion?

The solution is to start with the OMS since it can source all the necessary data, collate and analyse it and then provide appropriate suggestions to the sales trader in a manner that fits naturally within his existing workflows. This means that all sales trading activity is constantly guided by the quest for liquidity and, better still, this activity is fed back into the system creating a dynamic loop of up-to-the-minute opportunities. Without this tight integration, the process becomes cumbersome, and no matter how good the results are, traders will find it difficult to use and it won’t be as effective.

As the solution is integrated within the OMS it has access to all the live and historic orders, shareholders and watch lists that can be cross-referenced with items on the merchandise board to identify any potential matches to sales traders. These matches can be shown to the interested traders within the firm, all the while maintaining essential client confidentiality.

Based on activity within the OMS, there is a high probability of identifying multiple matches, but not all of these matches have the same relevancy. Leveraging attributes about those items, the solution calculates a relevancy score or heatmap for each match. This helps the sales trader quickly identify the most relevant matches first. Inputs to the calculation include items and their size on the merchandise board, live customer orders, historical orders over a period of time such as a year, client watch lists and shareholder reports. In the simplest case, live contra-side orders are more important than anything else. Next in line of importance are historical items that were traded recently, and so on.

However, calculating the relevancy of historical items is a little more difficult. For example, a relatively average sized contra-side order traded yesterday is more important than one traded six weeks ago. But if that historical order was much larger than normal it retains its importance for a longer period of time. It’s imperative that the solution provides time decay for the value of those historic items, otherwise the sales trader is easily overwhelmed with useless historical activity and might miss an opportunity to provide timely relevant information to his clients. Remember, time and accuracy are both critical.

The global dimension

Some brokers have multiple regional trading desks and want to view their liquidity across their entire organisation. When they use an integrated solution within each region, the local merchandise boards can be combined to create a single global merchandise board that is viewable by all traders in the various regions. Additionally, liquidity matches can be identified globally in stocks as well as depository receipts, fungible instruments, underlying stock on listed equity options, delta 1, swaps, etc. This provides immense value for sales traders servicing their customers in an increasingly 24×7 global model.

What about low touch?

Traditionally, it has been taboo to use a customer’s low touch channel to look for matching opportunities on the broker’s high touch desk. However, some institutions now realise the potential benefits of this service as long as it’s done within a controlled manner with the strictest security measures in place to avoid any information leakage. In the low touch channel, when a match is identified, only the low touch sales trader is alerted to the opportunity. He must secure customer approval to proceed, but if that approval isn’t granted trading continues with no additional information provided to anyone else, not even the high touch sales trader with the match. If the request is approved, the low touch sales trader then contacts the high touch sales trader with the matched liquidity.

Without these sophisticated solutions in place this opportunity would have never been identified and the broker would have missed a chance to provide a high quality service to his customers.

The way forward

In order to gain and keep a competitive advantage, firms need to collect and integrate multiple data points into the sales trader’s workflow. Data within the firm, such as research and investment banking activity from their CRM, provides a fuller picture of the touch points. Data from outside the organisation is becoming increasingly important too. Predictive analytics from social media, news sources and blogs, for example, all help supplement the conversation that the sales trader has with his customer.

With so much data available, the role of the sales trader is arguably more important than ever. Finding the block by bringing the right nuggets of information together is something that has and will continue to deliver meaningful value for the buy-side and, crucially, is something it will pay for.

In today’s highly automated environment, firms need to leverage smarter tools and technology in order to ensure their sales traders have all the relevant data points. And this needs to be done in a timely fashion so that opportunities can be identified quickly and acted upon immediately.

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