Trading Technology

10:55 AM
50%
50%

10 Ways to Manage Conflicts of Interest on Your Broker-Owned Platform

Buy-side clients need to understand that when they trade on a broker-sponsored platform, they are paying for these systems, whether that payment comes in the form of commissions, licenses, or widened spread. Therefore, the most important thing the buy side should do is to think like a customer.

The last year's market deterioration made things difficult for brokers, who are seeing tighter spreads, fragmented flow, smaller trade sizes, and compressed commissions. Brokers now face the most difficult operating environment in recent memory, with decreased market liquidity, increased message traffic and lower order volumes from clients.

Brokers also find themselves in an adverse situation, having over-invested in a number of areas, including their trading infrastructure, their capability to generate algorithms and their ability to process trades. Most broker's capabilities vastly surpass the current needs of their clients.

From Bad To Worse
And just when you thought that things could not get any worse for brokers, they are now increasingly subject to regulation seeking to promote transparency. Brokers also have to deal with plan sponsors who need to justify more effectiveness in trade handling, and, more generally a buy side that wants to clear up the inherent conflict of interest of broker-sponsored platforms.

As broker-sponsored platforms face an uncertain future, sophisticated buy-side firms have to answer difficult questions about how they manage the associated risks of trading on these platforms ... and whether those risks are worth taking at all.

Although broker-sponsored platforms can be conceptually acceptable, investors need to protect themselves against the risks that these systems could potentially generate, such as significant market impact, limitation of transparency and higher, undisclosed, transaction costs.

Top 10 Buy Side Concerns
Here are the the top 10 issues every buy-side trader needs to be mindful of to ensure efficient and effective trading on their broker-sponsored platforms:

1. Control Information: In the financial markets, information IS money. To avoid leaking information (and money) every buy-side firm should maintain a clear policy on its data flow, especially in markets with tight liquidity, like corporate bonds or blocks. Using single-dealer platforms or even multi-dealer RFQ platforms in some cases could be similar to advertising positions to the entire market place. The buy side should assume that information is public as soon as it reaches a broker operated single- or multi-dealer platform and check that its business objectives are compatible with this disclosure. (For example, iceberg and registered orders could be read and used by pricing servers.)

2. Use Multiple Platforms: Do you want to show all your order flow to one broker by accessing only their execution management system (EMS)? This can be a risky strategy. If you need to access single-broker platforms, it is best to have a few of them, so you can avoid giving one counterparty too much control over your execution quality. To be sure, to make it worth executing on a single-dealer platform, the capability to tap internal crossing capabilities should be, at the minimum, flawless. Don't think that consortia platforms are better in that respect -- they just distribute the information to more people.

[For more on how the buy side is evaluating EMS systems, read: Market Structure Drives the Buy Side to Seek New OMS/EMS Systems].

Philippe Buhannic, CEO and co-founder of TradingScreen, is an industry pioneer. Buhannic has stayed on the forefront of global markets and financial technology for more than 30 years, in a career that has spanned executive management, technical, and marketing experience in ... View Full Bio
Previous
1 of 5
Next
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.