the effective combination of both high touch and low touch approaches is not a binary choice but a blend that can optimise trading outcomes.
(This article first appeared on Best Execution, a Markets Media Group publication.)
High touch, low touch or both: what is the optimal choice for trading strategies? Edouard Petitcollot, global head of trading and securities financing at Candriam, talks us through the choices in our latest edition of our BEST EXECUTION Buy-Side Perspective series.
The difference between high touch and low touch has become pivotal when it comes to executing successful trading strategies. At the same time, the constant pressure on reducing transaction costs has also been pushing traders to navigate between technology-driven solutions and human expertise. The choice of ‘voice versus electronic’ or ‘high touch versus low touch’, has been at the forefront, reflecting the fundamental split between technological innovation and the human element.
However, the somewhat common belief that the rise of artificial intelligence (AI), automation, and algorithmic trading opposes voice trade and human interaction is not necessarily accurate. On one hand, tech-driven solutions complement traditional trading methods by improving efficiency, reducing operational risk and allowing a significant increase of volume traded. But on the other, high touch – or human – trading allows more complicated, less liquid or larger transactions on different investment strategies or assets classes such as arbitrage, equity small caps or high yield debts.
1. Low touch: Electrification and productivity
Undoubtedly, electronification and automation have revolutionised the trading landscapes across various asset classes.
Innovative trading platforms have had a significant positive impact on equity trading, increasing liquidity within the financial markets. These platforms, equipped with cutting-edge technology and advanced algorithms, have transformed trading by aggregating fragmented liquidity sources and enhancing market efficiency.
Indeed, innovative trading platforms, through their sophisticated order-routing algorithms and smart order routing systems, have been consolidating liquidity by efficiently matching buy and sell orders from disparate sources. This addition of liquidity pools is reducing the market impact of large trades and enhancing overall liquidity.
This transition has been particularly pronounced when it comes to bond trades and negotiation, as well with the equitisation of fixed income trading. The introduction of platforms facilitating portfolio trades and exchange-traded funds (ETFs) has streamlined processes, reduced manual intervention, and significantly enhanced productivity. By embracing automation, traders can execute transactions swiftly, capitalise on market opportunities, and mitigate operational complexities.
2. High touch: Liquidity and complex trades
While it is easy to see the benefits of the ‘low touch’ approach, we should not forget that ‘high touch’ plays a fundamental part in terms of quality and execution, for instance considering factors such as size per trade and execution price versus benchmark.
The high touch approach continues to play a crucial role in managing liquidity and executing complex trades. This is especially evident in small cap equity and high-yield bonds block trades, as these demand nuanced human interactions between counterparts. Arbitrage strategies and executing multiple-leg trades need the expertise of traders. As such, the human touch remains indispensable in scenarios where liquidity and complexity converge.
What’s more, traders can foster relationships with counterparties and financial institutions, cultivating a deeper understanding of the market – a platform or automated process or technology cannot do this. This relationship-centric approach enables traders to gain insights into counterparties’ positions, blocks, axes, risk appetites, and potential market moves – all crucial for executing larger trades effectively.
Human interactions allow more flexible negotiation and customisation of trade terms such as in relation to complex trading limits. In sophisticated transactions involving multiple legs or customised structures, direct communication between banks and traders permits the fine-tuning of trade parameters to align with the specific requirements of each party.
Another important factor is that the human touch fosters trust and confidence between trading counterparts. Establishing credibility and reliability over time through such personal interactions can be pivotal in executing larger trades in difficult and less liquid trading environment, such as during crises or market downturns.
Unlike technology, human trading has the ability to facilitate more complex and larger trades thanks to its relationship-building nature, the flexibility it provides in negotiations and risk mitigation, as well as its propensity to establish trust among counterparts.
While technological advancements have transformed the trading landscape, the irreplaceable value of human interaction remains key in executing transactions that demand personalised insights, adaptability, and a high level of customization in order to deliver better price and larger-in-scale or more complex orders.
3. Hybrid trading: A synergistic approach
So where does this leave us?
A compelling third way is hybrid trading, where traders combine the advantages of both high touch and low touch approaches. This hybrid model allows traders to leverage technology while preserving the value of human interactions. Traders can adapt to market dynamics by selectively employing automation for routine tasks while reserving the human touch for higher value added transactions.
For hybrid trading to be successful and effective, it needs to be developed through training initiatives for traders, both internal within their own firm and external, such as in conjunction with banks, brokers and investment solution providers. Traders need to be equipped not only with technical tools, but also with the adaptive capabilities required in a constant changing market environment where conditions can shift in seconds. And here is where training programs can make the difference. It is through training that traders’ individual performance can be enhanced and also aligned with other practices and convictions, for example, when it comes to the ethical and responsible practices expected from a responsible and sustainable asset manager like Candriam. The importance of training is recognised by the asset management industry for its role in improving productivity, and as a result numerous resources have been spent – and continue to be spent – on this.
To conclude, the effective combination of both high touch and low touch approaches is not a binary choice but a blend that can optimise trading outcomes. Leveraging on technology while at the same time acknowledging the importance of human touch and expertise enables traders to navigate the complexities of markets successfully and deliver both best execution and minimal transaction costs. It is not a question of one or the other, the answer is both.
©Markets Media Europe 2023
