Improve your trading in complex instruments

Published on 19 July 2021

Giving the buy-side easy access to complex products is very rewarding, but challenging. For sales traders to offer complex products to investment managers their trading workflow needs to incorporate sophisticated analytics and strong data, with either easily accessible or embedded risk calculations.

Sell-side adoption of tools including AI and ML is enabling some sales teams to boost their capabilities, in terms of product range and service levels to clients, say Pontus ErikssonAite Group‘s Spencer Mindlin and Stifel Europe‘s Paul Makepeace,.

Dan Barnes: Welcome to Trader TV – your insights into trading for professional investors. I’m Dan Barnes. Buy-side firms are demanding that sell-side firms are able to support workflows for trading complex products and low touch flow products on the same trading desk. This creates challenges, not least providing analysis of how trading performance has been. So today discussing this with me are Paul Makepeace, director at Stiefel Nicolas Europe, Pontus Eriksson, Head of strategy at FIS, and Spencer Mindlin, senior analyst at Aite Group.

Do you think that the high and low touch workflows that we’re seeing can be combined from a technology perspective? And how does that affect the technology needed?

Pontus Eriksson: From my perspective, we have a clear separation of low touch and high touch, and some people talk about mid touch, the type of transactions in between. And we have electronic voice and it’s understandable. So the trend right now is that there is a convergence between voice and electronic and also chat functions. So these type of applications that will come in the future, they need to marry these, so these voice-driven actions will eventually have to permeate the front office and be understood. And there’s also regulatory requirements coming in so that you can link and audit trades throughout the entire lifecycle. So I think the next generation of trading technology will have to enable that trade data extraction and linkage throughout the STP cycle, and for all but the lowest touch. So that full STP, they will require the ability to link voice and chat and electronic channels in the future. So right now, we’re perhaps not seeing that because it’s stressful times and because of COVID-19 and you naturally resort to traditional relationships, but I think that’s going to change. Give it a year or two and we will see some development there.

Spencer Mindlin: I think Pontus is absolutely right about the importance of voice and chat. In fact, I think we’re starting to see the needle move on what the integration really means with chat, with trading. If we were to turn the workflows on its head and the integration of low touch and high touch chat, I think we would re-architect our trading tools such that a unified chat layer was integrated in every trading system or back of the system that we use today, so that there’s a complete audit trail. And there are some systems out there that have various chat tools embedded. There are some that are coming up the curve. As we look at the evolution of chat over the next couple of years, I think Interop is probably likely to play a big role to bring chat functionality and embed that in all the trading tools and in an auditable fashion across the disparate front office, middle and back office systems right across buy-side and sell-side trading desks.

Pontus Eriksson: I’ve asked one person at the bank talking about fixed income and he said, of course we do what we can in the low touch business in terms of becoming more efficient and the high touch business is what it is. So it’s really the mid touch that they try to optimize and really work on to make improvements in terms of making it more electronified.

Paul Makepeace: You’re right. It’s that mid area where high touch can meet low touch, so when we’re moving from certain areas into that mid touch, which tends to be kind of midcaps and the less liquid names, that’s when it can be beneficial for that low touch order to meet that. And I think that will become more of an instant execution area for clients.

Dan Barnes: Client relationships, they’re still a qualitative thing. So as much as you need quantitative feedback and analysis to clients, you’ve gotta still maintain relationships. So coming from Spencers point about chat functions, that presumably still keeps some of the color in the market and that relationship going?

Paul Makepeace: Yeah, it does. And I think Spencer made some very good points that technology will grow in that area, as it has done over the last couple of years. You know, from vendors all the way to chat systems across the market has improved tremendously. But that will continue to evolve in a way that will meet clients’ demand, whether it’s individual stocks, sectors, macro commodities, etc.. That will be led in chats in a much different format than they are now.

Dan Barnes: How do you see the sell-side scaling up to support flow products.

Pontus Eriksson: The flow business is a low margin business, and that requires large flows to be lucrative. So it’s really important to be able to do to scale up. Flow products are generally low touch and they need to be fully optimized. But there’s always more you can do in terms of automation, STP and electronification. So I think you need to really harness the digitalized environment. You need to have the right technologies. You have to also develop the mindset across the organization to relentlessly optimize and automate every step of the value chain, so where you can, basically. So all the way from client onboarding into sales function through trading, all the way to settlement and back office.

Dan Barnes: How would you expect the sales and trading function for sell-side firms to have evolved over the next 12 to 18 months?

Spencer Mindlin: Well certainly within the next 12 to 18 months, I think the big focus is going to be the return to the office and figuring out, you know, what’s the communication protocol going to be for things like voice and chat with clients, with the introduction of all the new workflows and experiences we’ve had over the last sort of a year and a half. Looking past that, I don’t think user experience is going to deteriorate. I think we may see some re-training, re-tooling, transitions as people adjust to what it means to shift to things like portfolio trading of fixed income, or electronic trading straight through processing of illiquid asset classes, and trying to figure out how do you do smart order routing and visualization and AI and nonstandard workflows. Over the next 18 months and beyond I think we’re going to continue to see that evolution take place.

Paul Makepeace: I think, quite plainly, we’re going to see a much more blended approach in electronic trading driven by client demand, and we will have to adapt and make sure that we provide clients with the different asset classes that they need to trade efficiently.

Pontus Eriksson: Yeah, I think there will be relentless innovation. I think the electronification will continue. There will be better tools for sales to be smarter about how they work and who they engage with. Physical relationships will be augmented with artificial intelligence and those kinds of tools.

Dan Barnes: Guys, thanks very much. It’s been fantastic.

Spencer Mindlin: Thank you for having me.

Pontus Eriksson: Thank you.

Paul Makepeace: Thank you.

Dan Barnes: I’d like to thank Pontus, Paul and Spencer for their insights today, and of course you for watching. To catch up on our other shows, go to TRADERTV.NET.