Virtual Trading Clubs: The Next Big Thing?

When Martha Stewart announced a few months ago that she was ready to date again, she signed up for Match.com, an online matchmaking service, and the domestic diva, soon attracted many virtual suitors.

Stewart, 71, received more than 20,000 page views within days after loading her profile on to the site,” according to The Huffington Post. Stewart then narrowed the pool of 1,000 potential bachelors down to two suitors. In May, Stewart appeared on Today to meet her two choices, Larry, an international steel executive and Stan, a commercial film maker, both of whom were active 68 year olds.

You may ask what does online dating to do with Wall Street? Virtual trading clubs could be the next big thing for institutional trading desks that are seeking trusted counterparties, according to a white paper, written by Fidessa, about survival of the fittest in a challenging environment.

On the trading desk, buy side firms are hitting “a wall of complexity” with the complicated liquidity environment split between lit and dark venues. “Venue proliferation, HFT [high frequency trader] noise and IOI [indications of interest] spam, conspire together to make execution all but impossible,” wrote Fidessa in the whitepaper, “Survival of the Fittest Part III — Wish You Were Here,” Although buy side firms with difficult trades would like to pick up the phone and call their “friendly” sales trader for advice, when they hit the speed dial, that person may no longer answer. “In his place is a one-touch menu that lists thousands of algos all claiming to offer killer execution,” which is contributing to the buy-side’s sense of alienation. To get around the complexity, the buy side are “empowering themselves” by outsourcing the dealer process to firms that have the capability to understand all these thousands of algorithms. It’s not clear whether buy side firms are scrapping their trading desks, but that’s what it sounds like from the whitepaper. Option No.2 is to trade these large blocks amongst themselves, an effort that has not worked out so well. However, doesn’t disclose the names of any buy-side firms creating their own block-crossing firms. However, broker dealers view such networks as stepping in front of then and are reluctant to support such networks with their own client or proprietary liquidity.

The bottom line is that buy side firms are still searching for trusted counterparties who can take the other side of the trade, which is based on relationships with sales traders. But since the business model can’t support large numbers of sales traders anymore, in an interview, Fidessa’s Director of Strategy Steve Grob said he sees a role for social media concepts to be applied to electronic trading. Virtual trading clubs that serve as places where counterparties can meet. Social media could provide a way to form and create those trading relationships to help people evaluate them, suggested Grob.

“Look at the federated chat initiative that Markit is proposed with Thomson Reuters,” said Grob. While Bloomberg offers a chat system for Wall Street traders, rival Thomson Reuters and Markit are said to be working on an alternative. “They’ve got a whole bunch of banks and brokers and buy side on board to shares and federate their user ideas and they’re comfortable it can be done in a secure way,” he said. By setting parameters per asset class, such as credit ratings, collateral requirements and creating profiles, one can easily imagine how a social network could emerge for buy and sell-side trading. It could be the next iteration of exchanges, which in turn could link up with dark pools.

So while no one is expecting buy or sell-side traders to follow Martha Stewart’s example in looking for counterparties, there are more discrete ways that social media technology can be tapped to develop trusted relationships that enable participants to state their preferences and find the best match.