From The Editor: Breaking Up Is Hard to Do

Is the relationship coming to an end? Will we be hearing the big "D" word, or is the relationship between the buy side and sell side just maturing and evolving, as all long-standing relationships do?

Buy-side firms are taking more control of their trades and, rather than rely on the sell side for execution, they are using the sell side to provide analytics and technology to retool their trading desks. This is true particularly for buy-side firms that are leaning heavily on algorithmic trading. As a result, the industry is questioning the future of the partnership: Will there be a need for the sell side? Will sell-side traders leave their broker-dealers and become traders at buy-side firms? Will the remaining sell-side traders become consultants to the buy side? What will the buy-side/sell-side relationship look like in five years? Our cover story, starting on page 38, explores the possibilities.

What's most interesting is that despite the hype, there are really only a handful of traditional buy-side firms that are fully engaged in algorithmic trading. Those more-quantitative firms tend to do a lot of trading, though, which likely is why many studies show tremendous growth in the use of algorithms.

Recently, I moderated a roundtable of buy-side CIOs. I asked them how they were retooling their trading desks, expecting this to spur an hour's worth of riveting conversation. To my surprise, each CIO said he had no plans to use algorithmic trading. "What? I thought you wanted to take control of your trades, build up your trading desks and cast away your sell-side partners?" Apparently not. That conversation confirmed for me that the change in dynamic will take some time.

It will happen, but it will take several years. During the next three years, the sell side likely will transition to a consulting role - coaching those firms that haven't yet dabbled in algorithms - and reinvent itself to continue to add value. The buy side will build its desks and teams and then reevaluate its relationship with the sell side. During that time, the buy side may continue to rely on the sell side for more-difficult trades, until it's ready to go it alone.

Changing a relationship that has been around almost as long as the New York Stock Exchange is not something that happens overnight. Similar to the NYSE, the buy- and sell-side relationship is in transition and, like the NYSE, it looks like we can expect a hybrid model until the market can accept the change - whatever that change may turn out to be. After all, breaking up is hard to do.