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Buy-side traders shifting to mid-size brokers

24 January 2017

Bulge-bracket brokers are losing electronic equity business as institutional trading desks seek greater customisation

Read more: Greenwich Associates execution trading algorithm

Institutional trading desks are executing a decreasing proportion of electronic equity trades through the largest brokers due to dissatisfaction with the service they are receiving, according to research by Greenwich Associates.

Just 7% of the head traders in the survey were happy with the standard algorithms provided by their brokers, reporting that they feel the algos should be customised to their orders and trading style.

As a result, 87% of buy-side traders cited various circumstances under which they would route more electronic flow to non-bulge-bracket brokers.

The move away from bulge-bracket brokers is pushing institutional traders to use a greater number of brokers and push more flow to mid-size and regional brokers.

As the buy side takes more control over order routing, the nature of the buy-side/sell-side relationship will continue to change, according to the report’s authors. Traders are demanding increased levels of control and transparency of their order flow and enhanced customisation. In addition, they expect brokers to provide expertise to assist with market structure and regulation.

Richard Johnson, vice president in Greenwich Associates’ market structure and technology group, said: "It is becoming increasingly important to buy-side trader that they can customize algos and risk controls, and manage access to venues when executing – through algos and high-touch trades alike.

"In this zero-sum game, brokers who can demonstrate superior trading performance and domain expertise while providing control, customisation and transparency around routing will be in a strong position to win business."

Approximately 80% of buy-side order flow takes place using algorithms and smart-order routers to cope with the web of exchanges, ATS’s and dark pools that has developed over the last decade.

Greenwich Associates noted that in addition to trading, the responsibilities of a buy-side trader extend to full due diligence on each broker’s algorithm suite and transaction cost analysis.

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