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Execution consulting may not be new but it has gained traction in today’s fragmented, electronic world. Lynn Strongin Dodds reports

It may seem ironic that buyside clients are looking for a helping hand in today’s high tech electronic markets. However, if a recent crop of studies is anything to go they are seeking advice for optimal ways to navigate the increasingly complicated trading maze.  Naturally brokers and banks are more than willing to step up to the plate not only in response to their client’s needs but also as way to set themselves apart from their rivals.

In fact, a recent study from Aite Group showed that a hefty 87% of the 22 broker dealers canvassed viewed real time execution consulting services as a main differentiator, ahead of liquidity management, algorithms, technology support and research. Laurie Berke, principal at TABB Group, who identified the trend over two years ago with her report “Execution Consulting: the Next Generation in Sales Trading,” attributes one of the main drivers to “buyside firms having to become more knowledgeable and experienced in self direct trading. Algorithms have become commoditised, and buyside traders no longer look towards the sellside for simple technical support but rather to add value to trading performance. This new-world sales trader offers insight, advice and information, and delivers it right alongside an in-depth quantitative analysis of the venue-specific results of smart order routing logic.”

For now, only around 13% of asset managers currently tap into these services according to industry figures but that number is expected to grow in time. In many ways, it is a reconfiguration of an offering that was tied to programme trading. The difference today is that the level of sophistication has been ratcheted up thanks to MiFID in Europe, Reg NMS in the US and a host of other regulations. Liquidity has been scattered across a wider array of dark and lit pools and while the once cutting edge tools of direct market access and smart order routing have a place, buyside firms also want a more nuanced approach to the changing market structure.

In the US alone, TABB Group figures show that fund management firms currently execute 48% of their US equity order electronically over 65 trading venue using more than 600 broker-built algorithms, thousands of smart order routing logic solutions and an endless stream of post-trade transaction cost analysis data. “Execution consulting is becoming a big topic as the electronic component has become bigger,” says Adam Toms, chief executive of Instinet Europe. “It is not just about execution but the advanced analytic product set. I think it will become more important because buyside traders are focusing more on the value that their brokers are creating.”

Different options

Of course there is no one size fits all strategy and each brokerage firm has its own spin. There are common threads though in that they all are aiming to offer more of a personalised and tailored service. This ranges from high touch advisory and trade and risk execution analysis to real time tools for live insights, according to the Aite report. For example, Bank of America Merrill Lynch (BAML) offers bespoke analytics to expose trends and opportunities to enhance the trading style or strategy customisation while Citi dissects algorithms and monitors the liquidity they interact with in order to improve performance. Both global banks also have the advantage of being able to leverage their group’s wide range of expertise on multiple disciplines, risk management, transaction cost analysis and quantitative research.

Bloomberg Tradebook, on the other hand, has dynamic execution consulting which includes flexible order delivery solutions, pre-trade analysis and tools, real-time trade implementation analytics and alerts as well as post trade analysis. It also offers trading workflow consultations, customised client workflow solutions, education and training, market structure and regulatory commentary plus trade optimisation analysis and feedback

“Execution advisory services started on the programme-trading side with pre and post-trade reporting,” says Francois Banneville, global head of execution services at Société Générale. “Before you executed the order you would look at the names, illiquidity, size and the best way to execute the program. Today, it is trickier because the markets are more complex and fragmented with different exchanges, dark pools and broker crossing networks. As a result, execution advisory services are much more technical and quantitative and linked to the microstructure. Clients want much more detail, a greater understanding of what makes prices move and more analysis on their trades. There is also a much greater awareness of benchmarks and performances. We look at up to 50 parameters and statistical indicators when we execute an order.”

Chris Jackson, EMEA head of execution sales also notes that high frequency trading and regulation have created a much more challenging environment. “The terms of TCA have become far more complex – historically relatively few tools were available – VWAP and Implementation Shortfall being two of the most prevalent. In recent years though, in an effort to reconcile opposing variables like market impact and time risk, TCA providers have developed increasingly complex measures often relying on complex and obscure proprietary calculations. “This has led to more rather than less confusion and uncertainty around what constitutes good execution.

“We are able to analyse a client’s trading style and work with them to customise our trading platform to suit these objectives. We’ve worked with clients to develop systems for splitting inventory between high and low touch to maximise efficiency and performance”

Brian Schwieger, head of EMEA execution sales and consulting at Bank of America Merrill Lynch also sees a greater move towards bespoke products.  “There is definitely greater customisation which can range from providing minor tweaks to a clients’ strategy through to designing and implementing new strategies to meet client’s specific trading objectives. Through execution consulting, we are able to drill down deeper into algo behaviours and performance to offer a more granular view of the best way to trade. We can also offer systematic solutions for increasing trading desk productivity like filtering off smaller orders that can be automated so traders focus on the more difficult ones that need the human touch.”

Moving across

Although execution consulting started in the equities space, Berke sees the service migrating to other asset classes. “This new hybrid sales person, the execution consultant, part trading partner and part trading guide, has developed the DNA to survive and thrive in the new normal of trading in the capital markets,” she says. “Sellside equity trading rooms have been reorganised and reconfigured. In one firm, pods of experts across multiple verticals – equities, futures, ETFs, algorithmic trading – team up to serve a unique set of clients; in another, individuals develop the skills to bring one type of client across both high- and low-touch trading solutions.”

Jim Kwiatkowski, global head, transactions sales, marketplaces, financial and risk, Thomson Reuters also sees a gradual shift occurring. “Just as with equities, execution quality analysis has become important in the FX markets and we are seeing increased demand for consulting services. This was not commonplace five to six years ago. Part or our service includes using our analytics to help clients better understand and improve upon their current execution strategy.”

Robert Shapiro, global head of trading and execution consulting at Bloomberg Tradebook echoes these sentiments. “Five years ago, the main focus was on equities and it involved taking full service traders and making them electronic. Today we are seeing the evolution of execution consulting into other asset classes. However, this does not happen overnight and we spend a great deal of time extensively training sales traders through our accreditation programme. We see this as one of our main differentiators and it underpins our technology and analytics.”