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Agency Brokers See Growth as Business Evolves

Automation and electronic trading may have taken over Wall Street, but the buy side continues to rely on its agency broker counterparties for a more specialized, personal trading experience.

Three years ago, if you asked most traders what the future held for the agency broker model, the consensus would have been clear: There was no future.

With electronic trading and automation all the craze, the agency broker -- the middleman known for high-touch trading and hand holding -- was becoming obsolete. Why would the buy-side trader need an agency broker as he garnered more and more tools and electronic access to control and execute his own trades?

Fast-forward to today, however, and the agency broker model is alive and kicking, with a specialized focus on something for which the buy side has an acute demand -- block trading. In today's ever-more electronic and fragmented market, the block trade has become increasingly difficult to execute. Average execution sizes on the exchanges continue to drop, and the ongoing explosion of algorithmic trading means further slicing and dicing of orders.

So despite the high-tech onslaught, high-touch never quite went out of style. Rather, the buy side evolved its trading strategies and now covets the best of both worlds -- a combination of electronic trading tools and access to the personal, high-touch trading needed for block trades or difficult-to-trade stocks.

Buy-side traders don't deny the role of their bulge-bracket broker-dealers, but more and more are relying on the agency broker for unconflicted execution of blocks and hard-to-trade names. They say they like knowing the agency broker isn't involved in proprietary trading.

But the agency broker has to provide more than just execution and more than just technology in order to be successful. As the buy side has evolved, the agency broker has evolved in tandem, becoming more of an execution consultant -- offering insight into trading and portfolio strategies, and market microstructure; and navigating those pesky dark pools.

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