The rapid development of new technologies has shifted the electronic trading landscape dramatically, leaving many in our industry scrambling to meet new demands. These changes are most apparent in the evolution of low touch trading due to the introduction of algorithmic trading strategies. Here’s what you need to know so you can effectively integrate low touch trading as a complement to your existing high touch strategy.
In the past, low touch trading encompassed a straightforward workflow. Buy-side firms sent order flow through direct market access (DMA) routes provided by their sell-side brokers. However, the simplicity of DMA routes failed to keep pace with the growing complexity of trading and are now being replaced by sophisticated low touch strategy based algorithms. Algorithmic trading strategies are computer algorithms that execute orders around a set of parameters designed to improve earnings and reduce costs. In addition to improved execution quality, these trading strategies increase transparency and put control back in the hands of clients.
Peter Bazylewicz, Director of Business Development at Guzman & Company describes how their low touch algorithmic trading flow is now, “fulfilling the needs of the buy-side trading desk in a post-MiFID II world – best execution with complete transparency and control. “ The widespread adoption of algorithmic trading has transformed the once simplistic linear workflow that dominated low touch trading into a complex and highly managed segment of an orders life cycle.
For brokers, keeping pace with such drastic workflow changes is no small task. Staying competitive requires close scrutiny and analysis of client orders. Trade Cost Analysis (TCA) has been instrumental in shaping the current management of low touch algorithmic order flow. “It has become the norm for trading institutions to utilize TCA systems to recreate their workflows, enabling a systematic evaluation of their trading network and end execution quality.” said Brett MacLeod, Senior Vice President at Abel Noser Solutions. “Understanding the results and applying insights gained gives market practitioners a direct edge in capturing alpha.”
Capturing alpha refers to gaining excess returns on an investment beyond a relative benchmark index. Low touch algorithmic trading is uniquely suited to capturing alpha because the level of detail and transparency is much greater than in high touch order flow where human error can muddy the waters preventing accurate analysis. Low touch algorithmic trading utilizes distinct parameters that can be tracked throughout the entire life of an order and strategy performance can be standardized to determine best execution. Brokers who neglect the value of TCA in conjunction with low touch algorithmic solutions risk losing out on a highly profitable revenue stream to complement their high touch business.
In order to take full advantage of low touch trading opportunities, brokers must provide their clients with an array of unique algorithmic trading strategies that produce reliable, cost effective executions. Rising to meet these challenges with constrained resources in a highly competitive market is daunting; however, there is a path to success.
Success ultimately requires differentiating your strategy offerings and maintaining sophisticated flexible technology that is capable of accommodating a wide range of client objectives. Guzman & Company has found success with their Electronic Trading Solutions program by leveraging SS&C’s OMS solution MarketTrader to create their own unique suite of performance driven algorithm strategies. MarketTrader directly meets the challenges faced by brokers today by supporting both high touch and low touch order flow, and delivering timely, custom solutions.
Peter Bazylewicz describes how Guzman has been able to combine their electronic order flow into one solution that is, “utilized both internally by our PT Desk and integrated with a host of OMS/EMSs enabling our clients to access the solutions in a self-directed manner. SS&C MarketTrader serves as the hub for our solution and delivers everything we need in terms of technology, performance, risk-management and compliance.” This combination of flexible, performance oriented technology and streamlined services allow Guzman to better meet the needs of their clients and stand out among other brokers.
“The Electronic Trading Solutions has been instrumental in the growth of our Global PT business and opened-up a new low-touch revenue stream,” says Bazylewicz.
To learn more about SS&C MarketTrader, please visit our product page.
Asset Management, Wealth Management