There is a lag between the rate of change in the trading world and the speed with which technology providers can help fund managers cope, finds Nicholas Pratt...Nicholas Pratt reports
In-house dealers have had much to keep track of lately. On top of regulations from Europe that force dealers to obtain ‘best execution’ for equity trades (and which have led to the creation of more stock exchanges for dealers to cope with), they also have to support their firm’s growth plans that typically span multiple geographies, time zones and asset classes.
The in-house dealing desk is, therefore, an increasingly important component within a fund managers’ organisation – as are the individuals in charge of it.
For well over a decade now the majority of firms have recognised that trading is complex enough that it should be the responsibility of dedicated professionals and not simply left to portfolio managers. But it is perhaps only in the last five years that managers have invested heavily in beefing up these in-house dealing desks.
Some of this is down to the changing nature of fund managers, their global ambitions and their desire to trade in increasingly complex asset classes across all available time zones. But there have also been some changes in Europe’s securities marketplace, such as MiFID, that have forced dealing desks to invest in the tools needed to keep track of the various sources of liquidity and ‘execution venues’ that spring up seemingly on a monthly basis.
Technology and data providers have leapt to support them, but this has led to a deluge of ‘solutions’ that heads of dealing have had to assess. And, as our survey suggests, dealing chiefs have not always found the extra tech help particularly helpful.
Smart order routing (SOR), the process by which a trader’s order navigates the marketplace to find the ideal match, is one of the innovations that technology providers have responded with. But it is still a relatively immature and unproven technology. Many dealers are suspicious that the routers are not as smart as they profess to be, but so far they are unable to prove it.
This lack of evidence is down to the paucity of transaction cost analysis (TCA) – the data used to show how efficiently each trade has been executed. Currently most TCA data only includes the major exchanges and not the raft of new alternative venues, leaving many dealers in the dark. Nigel Coleman, UK head of equity trading at Credit Suisse’s asset management division, said recently at the Trade Tech conference: “The TCA industry has had it easy for too long. I want to know how smart my smart order routers are and I can’t do that until TCA vendors start including alternative venues.”
We asked heads of dealing where they would most like to see more development. The answers show the dilemma facing
the industry – and the vendors that supply it. MiFID, best execution, dark pools, dispersed liquidity, algorithmic trading and low latency have all created clear opportunities for traders to expand their reach, pursue more sophisticated strategies and insist upon more efficient and low-cost execution. But, right now, the immaturity of the technology, the limitations of the products and the lack of clarity around regulatory changes mean that traders are currently in that strange stage where they are not sure if things were better and easier when they first set up their desks more than a decade ago.
In time, of course, technology will mature, products will improve and the regulatory landscape will become clear. In the meantime, however, dealing desk heads must continue their often unheralded but increasingly appreciated efforts.
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