Low-touch fee, high-touch service

The advent of electronic trading has thrown commission arrangements into disarray.
Low-touch fee, high-touch service

This article is excerpted from "Smaller, cheaper, faster: Trading Asian equities", a supplement to AsianInvestor's April edition.

The electronic revolution is putting pressure on the way in which the buy side pays for the services it receives from brokers.

The sell side, particularly bulge-bracket firms, has attempted to overcome the problems of fragmentation in Asia through technology. That’s an expensive proposition. Moreover, as clients’ trading strategies become more active and discerning, they demand more customised solutions. That’s expensive, tool.

Brokers’ jobs have changed. There remains a need for old-school sales traders, people who work the Street searching for blocks. The most skilled are in high demand.

That skill-set increasingly requires brokers to be tech-savvy. They have to be able to span the entire range of services, or at least be able to advise and direct a client to specialists ranging from the facilitation desk to electronic support.

The job on the electronic desk has changed too. When electronic trading was first introduced, this ‘low touch’ service was meant to be so simple that clients could ‘set and forget’. But electronic trading is not simple, particularly as algorithms have evolved in complexity and ability.

“Algo service has evolved away from being low-touch,” says Mark Davis, Asia-Pacific head of equity execution sales at Deutsche Bank. “High-touch service is needed to help a client pick the right solution.”

Brokers’ electronic support has become almost as ‘high touch’ as traditional sales trading. The people manning these desks used to be operational clerks or IT nerds, but increasingly brokers are putting sales traders there in the guise of consultants.

In many cases, the algo desk is also fusing with program trading. "Many historically large program-trading clients are using algorithms to execute basket transactions," notes Gene Reilly, managing director at Bank of America-Merrill Lynch.

The shift to low-touch service began as a means of cutting costs. Brokers looking to win market share offered it as a cheaper means of accessing stocks.

“That raises questions about service for low-touch orders,” says Hani Shalabi, Asia-Pacific head of advanced execution services at Credit Suisse. “Clients still want us to handhold the order, but for a low-touch commission.”

That demand is forcing algo desks to improve service levels, but that's difficult given the proliferation of orders across multiple venues...

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