Intelligent Trading: Opportunities for Mid-Tier Brokers

The past couple of years have seen broad structural changes to the world's financial markets. While this is almost universally believed within the industry, what is less widely accepted is the fact that these changes have resulted in a permanent and profound shift in the role and operating environment of sell-side firms. Success can no longer be guaranteed simply by intermediating between clients and sources of liquidity; a change of approach is needed.

Finding traction in the new environment characterized by a fragmented market structure, regulatory change and a decline in both trading volumes and commissions presents brokers with a real challenge. One possible approach is to scale up, although this is not without its own obstacles and may not be a realistic option for some smaller and mid-tier brokers. These firms must look at ways to assert their position by providing relevant, targeted and intelligent services that add real value to an increasingly discerning client base.

That said, the deluge of data at each stage of the trading process makes this quite complex. Fundamental and underlying technical data that previously underpinned successful trading is now a commodity. They are no longer enough to secure optimal trading outcomes nor are they a source of competitive differentiation. The pressure is on to find ways of combining a growing universe of regulated and unregulated data with specific firm-wide intelligence regarding current and historic client activity, and using this to power a more valuable service to clients.

But finding relevant information, then extracting, normalizing, translating and storing it in order to make it available in the most appropriate and suitable time period presents a significant operational challenge.

At the pre-trade level it's all about 'actionable' data, embedded in brokers’ daily workflows enabling them to react faster than anyone else to revenue-generating opportunities. On receiving an order, for example, a broker could look at appropriate stock holdings among buy-side clients as well as historical information about previous activity, trading patterns or expressions of interest. Done intelligently, this gives sales traders a to-do list that provides the best chance of optimising the outcome. The tools to transform uncorrelated, raw data into weapons-grade information are critical.

This pre-trade visibility must also extend to the real-time execution process. As more brokers outsource their execution to larger firms, the real value lies in the ability to interpret and analyse the myriad available execution offerings, in real time and without bias. Firms with the ability to communicate likely execution outcomes to clients in real time and make any changes mid-flight to secure the preferred outcome will come out on top. These real-time intelligent execution services can help turn the regulatory obligation of best execution into competitive edge.

Post-trade, brokers can extend this idea to provide standardized, accurate and objective analysis of their own trading performance, supplementing the ubiquitous but subjective VWAP, TWAP and Implementation Shortfall measurements. Some firms are taking the concept of TCA further, using this greater internal visibility to understand better their own business. Monitoring and interpreting their own trading performance, and making the necessary adjustments, allow them to identify and improve areas of weakness and better manage cost and revenue dynamics. The same information can also be used to improve service levels through the delivery of better, more timely information, thus allowing brokers to forge deeper and more meaningful client relationships.

When combined, these activities allow for truly intelligent trading: Carefully targeted activity that is informed and driven by accurate data and in-depth analysis. It improves profitability and enhances client relationships. But perhaps the real advantage lies in giving firms that choose to go down the outsourced execution route the ability to analyse and interpret the actual performance of the outsourced provider. In doing so, they create the value necessary to avoid disintermediation.

James Blackburn is marketing director of the EMEA Hosted Business Unit for Fidessa.