Published On: Thu, Jul 8th, 2010

Electronic Trading and the Sell Side Trader

Sell Side TraderThe sell side or “high touch” trader as they have come to be known are high energy, multi-tasking individuals. Typically at the desk before 7am to hear the latest from research and sift through overnight developments these people are synonymous with that power broker stereotype often depicted in Wall Street films. There’s is a close relationship with the buy-side often passing trading ideas and information to their clients in the hopes of generating some trades and, of course, that full-service commission. But how has that relationship changed when the buy-side has several options with which to execute a trade in our highly electronic world.

The strength of the relationship of a sell side trader and the buy side are the quality of the trading ideas and how well those ideas are implemented. The full service commission exacted by the broker is justified by those ideas but also by the ability to obtain a good price for the trades. This is where the dealer comes in. The dealer is usually a long time trader who knows the market and names that he is trading intimately. He usually knows the participants and can react instinctively to new developments in the market usually better than an algorithm can. All day long the broker is barking at the dealers to produce a good result so their client will come back tomorrow.

The proliferation of algorithms, Direct Market Access (DMA), program trading, alternative trading venues and unbundling offers a substitute to the sell side broker and their larger trading fees. Commissions are almost always lower trading electronically and not every trading idea or opportunity requires a phone call to the broker to execute. Perhaps a fund is accumulating a position over weeks or tweaking its allocation and would like to sell in rallies or just too small to be services by a broker . Electronic trading provides the means to do these kinds of trades, in turn, stimulating a shift away from these high touch traders. But not entirely.

In times of uncertainty or high volatility the buy-side will always seek her broker for some peace of mind, insights into the market or better execution that an algo just can’t realize in some markets. It is this human touch that will always guarantee a place for the sell side trader.

There is a new kind of sales trader, however, who often won’t regurgitate to clients macro views held during the morning call but instead offers a micro view inside the life cycle of a trade attuned to what algorithms to use and when. These “low touch” traders scan client electronic orders all day looking for ways to help the buy side achieve best execution. Often armed with real time intra-trade analytics this new class of sales trader can assess when to adjust aggressiveness, participation rate or recommend changing to a different algo entirely. With this information in hand they can then discuss with their client and make an appropriate suggestion to help the buy-side avoid paying the spread or moving the market adversely.

With all the expanded services to the buy-side coupled with technological improvements the execution pie has certainly grown allowing for new entrants and trading strategies to flourish where they hadn’t existed before. The core relationship between the sales trader and the buy-side will always hold despite the velocity of change in the trading business. The only difference is that other execution specialists are now required to service the buy-side and other relationships are necessary to retain and foster new and existing business. It’s not that the sell side and buy-side relationship has changed so much in the electronic trading morass it’s just that the diversity of trading mechanisms requires other specialist sell side traders to help clients earn that hard fought alpha. Neither will replace the other and are in fact complementary allowing an increasing variety of service to different kinds of buy-side

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  1. Tim Walters says:

    One point of view, based in the U.S., is the sell side only existed for initial public offerings AND, on the back of that, for liquidity for when that IPO (now seasoned) needed to be unwound by the buy side. Mutual Funds absolutely needed a way to unload or lighten a position and the sell side, with its distribution channels, could achieve this. Sell side research was a natural extension of this paradigm.

    Through intermediation many of those related services now rest in others’ hands (venture capital, private equity, limited partnerships, soverign wealth funds, consultants, independent research, etc.).

    There is one good reason for keeping the sell side around, however. It prevents people and firms from buying and selling securities out of their garage and it leaves a good place for regulators to come in and examine customer and firm data. After all, bd’s in the USA are technically considered extensions of their respective SRO’s.

    In the future bd’s could become just access nodes to the markets and a place for regulators to take a pulse – everything else could find a more specialized, more genuine, more cost effective outlet.

    It is much better for a large institution to unwind a position versus a natural buyer/seller so it won’t have to compete with the sell side trader unwinding at the same time. Autex will replace sales traders (cheaper), dark pools and crossing networks will replace traders (cheaper), and research sales will be replaced by something soon.

    Of course there will be exceptions and this is just my two cents on the subject.

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