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Brokers Change Strategies as Electronic Trading Proliferates

Posted: 15 Feb 2012

Over the next few years, the brokerage business will evolve away from execution toward a model in which brokers provide advisory and strategy services and trades are managed electronically, according to Greg Pritchard, managing director of Dedication Group.

“People will continue to have relationships with brokers and relationship managers who can guide them at a macro level or what’s happening in the markets with particular securities or instruments – that’s going to remain,” Pritchard says. “That’s based on research, that’s based on industry experience, and that sort of thing isn’t really going to go away because people are looking for experts. But when it comes to executing trades in the market, all that execution is going electronic. It is not something that humans can keep up with to a competitive advantage.”

Dedication Group is a provider of specialist financial markets technology solutions and works on derisking implemented trading, risk management, securities lending and structured products systems. As such, the firm sees how brokers are changing their strategies and responding to developments such as high-frequency trading.

“What we see, and what we get involved with, it’s a move from a whole floor of traders to almost becoming a three-pronged trading function around risk and compliance and IT,” Pritchard says. “We get heavily involved in the IT side, and we’re experienced with the risk side.”

Because of the evolution of IT solutions and the growing need to automate trading processes, businesses need to first focus on their strategy before looking to implement automated trading activities or to start high-frequency trading (HFT), particularly risk systems. Pritchard compared HFT to a Ferrari.

“You can’t drive a Ferrari everywhere,” he says. “If HFT is not part of the business strategy, it’s not something to do automatically. You have to think, is your goal to be first and fastest, or to create a relationship with the client? HFT is a tool – a very expensive tool, but a tool.”

Before implementing HFT, Pritchard says that firms must be aware of how to set up algorithms for trading, noting the experience of the 2010 “flash crash” as an example of what happens when algorithms go wrong. Unlike manual processing, “taking hands off a keyboard” doesn’t stop a trade from happening, particularly if servers are located in different countries. Setting up risk and compliance systems is particularly necessary from a viability perspective, because while regulatory concerns are one issue, preservation is another, perhaps more pressing concern, he says.

“There’s really, in the current market, there’s no appetite for a blow out,” he says. “We are engaging in some high-risk projects at the moment, and risks are always one of the first things to deal with. We’ve got some projects coming up where the first and foremost is the risk and implementation because there’s no appetite for blow out.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.