Carlo Contino of the Market Hub Brokerage & Execution Team considers in this article two key drivers of the changing equity broker value proposition.
First, the need for high-touch desks to focus on complex orders like programme trading and corporate actions that require high levels of skill and intervention. Second, the hefty AI-related investments by brokers in recent years that are now taking algorithms to the next level, enabling clients to get direct control of its flow.
The broking industry has seen a significant evolution in the last couple of decades, and led by both technology and client demands it continues to improve. Two important drivers have been the electronification of the whole trade cycle and globalisation. The more integrated the financial markets, the easier it has been for global investors to invest in stocks around the globe. Following this evolution as well as the recent boom in retail flows, due to both the broader financial education of investors and the wider use of electronic platforms, brokers are constantly pushed to offer more tailor-made services to an ever-changing clientele.
Institutional clients and retail clients have been affected differently by these changes. On the institutional side, with the current innovations in the AI space, algorithms are more and more in the spotlight. Brokers are now devoting increasing budget to algo-related projects, providing clients with real-time analytics and cutting-edge algorithms which let them have full command of the trading process. The normal toolbox of a broker is to offer high-touch trading (where the trading desk receives a care order and follows the trading instructions agreed with the client) or low-touch trading (direct market access [DMA], where the client can send orders directly to the financial market via the broker infrastructure). With the current boost to AI, brokers are now ‘raising the bar’ by providing clients with algos which could now be fed with past data. An example is during main indexes’ rebalancing sessions where the volume curves to follow VWAP may change quite dramatically during that very trading session.
While on one side this ‘leap forward’ provides a very powerful tool, where algorithmic trading can help to reduce costs, improve performance, and provide more control to the trader, the flip side is bringing more complexity for the client to follow the way the algo works. And this is where the broker may add critical value for the client, namely close client support in rapidly assessing the algo performance and solving issues should they arise. To ensure that the algo is running smoothly, it is important that the broker provides support and guidance with its knowledge and market experience. This new approach, leaning more toward mid- to no-touch, has now made more important the use of complementary data/analytics tools (such as TCA) and deepening the reach of executing venues (dark-pools and regulated markets).
Coverage is another key factor for clients to consider. Brokers need to have a wide range of coverage if they are to provide the best possible service. This includes both the types of securities and the geographical areas they cover. Clients should also look for a broker that has strong relationships with key market makers and other liquidity providers.
Dark and lit trading is another consideration for clients. Dark trading is the buying and selling of securities that are less transparent to the public and is more dedicated to larger size orders or under regulatory waivers, while lit trading is visible to the public. Dark trading might offer some advantages for traders, including reduced market impact and improved liquidity. However, it is important to consider the cost of dark trading, as well as the potential issues that can arise with it.
TCA is another key element for brokers’ selection. Transaction cost analysis (TCA) is a process for measuring and managing the costs associated with trading activities. TCA can provide valuable insight into a broker’s performance and can help to ensure that the client is getting the best execution quality.
Data and analytics are also essential to distinguish a broker’s service level. They can also help provide more insight into the markets and can help traders to make better trading decisions. Brokers should have access to a range of data sources and should be able to provide clients with the ability to manage, analyse and interpret the data.
Finally, market access is an important factor for clients to consider. Market access refers to the ability of a broker to connect a client with the markets they need to trade in. Brokers should be able to provide access to a wide range of markets and should have the ability to provide clients with a range of different trading options.
Switching attention to the retail side, one of the most significant changes in the equity broker value proposition for retail flow has been the shift towards self-directed investing. Retail investors now have access to a range of online platforms and tools that enable them to research, analyse and execute trades on their own. Furthermore, they have been key in raising retail clients’ market knowledge (thanks to the supporting educational tools provided by the platforms), and to help clients build diversified portfolios that align investment goals and risk appetite with personalised investment advice. As a result, equity brokers are increasingly focusing on value-added services and products that complement self-directed investing.
Equity brokers are leveraging their expertise to provide retail investors with timely and relevant market information that can help inform their investment decisions. Another way brokers are adding value is through the expansion of their product offerings. Many brokers are now offering alternative investment options such as cryptocurrencies, fractional shares, and thematic investing. These new offerings allow investors to diversify their portfolios and take advantage of new investment opportunities. Finally, equity brokers are increasingly focusing on providing an exceptional customer experience. They are investing in user-friendly platforms and interfaces that make it easier for retail investors to manage their investments and access information. They are also offering personalised customer support and educational resources to help investors navigate the complexities of investing.
In conclusion, the changing broker value proposition has opened up a number of opportunities for clients. By considering all of the above factors, clients can optimise their relationship with brokers and get the best possible service and experience. And, by understanding the different elements of the broker value proposition, clients can ensure that they are making the most of their relationship with their broker.
