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Delaware Investments
Others, such as transaction cost analysis, have been rendered relatively insignificant. Granted, everyone needs to have them, but their relevance is clearly debatable.
As for algorithmic trading, this one really puzzles me. Statistics show that the use of algos is still on the rise, many sessions at conferences are devoted to the topic and nearly everyone feels the need to have them on their desks. Yet the more people I speak to on the subject, the one message that seems to come through is that they are not nearly as effective as advertised. Based on my personal experiences, the best algo solution can't come close to matching the service and end result of any of my top five human brokers. But that's an argument for another day.
Today I'd like to talk about the hot topic of the past year or more -- commission-sharing arrangements, or CSAs. As CSAs continue to gain momentum, they should remain relevant through 2008. But CSAs will not fade away. Rather, they are the next industry-changing innovation. While Liquidnet changed the way we trade, CSAs will change with whom we trade.
Someone once told me that algos were a sell-side solution for which the buy side did not ask. Well, I'm not sure who came up with the CSA, but the buy side clearly is asking for it. There are many benefits to having a CSA in place, all of which ultimately are beneficial to a firm's clients. A shorter list of research brokers with whom one trades means the quality of coverage and service received will be greater, leading to better execution and performance for clients. The ability to find natural trades may finally return to the nonelectronic world, as everyone begins to embrace CSAs and gives more meaningful flow to brokers again. And as transaction cost analysis reports often show, a natural trade is most often the lowest-cost trade. And I would imagine that as firms begin to do more business with their top brokers, better IPO allocations may be forthcoming, again resulting in better performance for end clients.
In other words, CSAs become a win for the buy side (i.e., better performance for its clients) and a win for the big shops on the sell side. But there is a cost, one that cannot be overlooked. If the use of CSAs means that the big sell-side shops win, surely the middle and lower tier shops' trading operations could be jeopardized. Let's face it, some of these smaller trading desks must have been barely breaking even or maybe losing money before CSAs came along. But if these firms start to get paid for their research via a CSA check rather than direct trading, people will lose jobs and trading operations will be discontinued.
Keeping things in perspective, however, while many traders could lose jobs, the sheer number likely will pale in comparison to the number of bulge-bracket traders who were cut loose in the first few years of this decade when the market corrected. The fact that people in our industry ever lose jobs is unsettling, but change is inevitable. As a buy-side trader, I have a fiduciary responsibility to my portfolio managers and the investors who have placed their faith (and money) in my firm. If it means I have to make some hard decisions about how to conduct my business, then I really have no choice. As I'm told by a very respected colleague almost daily, "It's not personal; it's just business."
Read about issues that other buy side traders think will be critical this year:
 Dan Mathisson Managing Director, Head of Advanced Execution Services (AES) Credit Suisse |
 Timothy Christiansen Equity Trader Sawgrass Asset Management |
 Bryan Kievit Head Trader Accipiter Capital Managment |
