Grygo is chief content officer for FTF
Buy-side traders may have one reason to breathe a little easier amid the pandemic-induced downturn and related market volatility.
State-of-the-art, integrated, electronic transaction platforms are not likely to replace humans on the trading desks any time soon, according to researchers at market research firm Greenwich Associates.
“The average number of traders on buy-side trading desks was essentially unchanged from 2018 to 2019 at 8 in fixed income, roughly 7.5 in equities and approximately 6 in FX,” according to the market research firm’s findings. “Despite fears that electronic trading will eliminate jobs on buy-side trading desks, recent investments in technology have not come at the expense of traders. Rather, buy-side institutions are using enhanced, integrated technology platforms to expand the reach of their human traders.”
Still, the researchers report that the buy-side trading desk budgets “remain tight, especially given current market uncertainty,” according to the new report, “The Fixed-Income Trading System Evolution: Creating Something Completely New,” released earlier this month.
“Nearly 60 percent of the average buy-side fixed-income trading desk budget is spent on trader compensation. For smaller hedge funds, that number jumps to nearly 80 percent,” according to the report.
While traders may command high levels of compensation, buy-side firms are making them do more for it.
“Many [buy-side traders] are seeing their responsibilities grow and expand into new areas/products — especially in this current work-from-home environment — and most are trading more than one asset class or product,” according to Greenwich Associates. “For example, 47 percent of fixed-income traders are also trading derivatives, 26 percent FX [foreign exchange] and 20 percent ETFs [exchange-traded funds]. Equity traders are even more diverse, with 60 percent of cash equity traders also trading ETFs, 45 percent derivatives, 35 percent FX and 21 percent fixed income. Traders in past years have reported spending more time on compliance interactions and transaction cost analysis.”
In addition to trading in more areas, better order and execution management systems “have provided the leverage these desks need to gain an edge going forward,” according to the research.
“Improving execution quality can yield meaningful cost savings as well. For instance, every 1 bps [basis points] improvement in price on the roughly $20 billion of investment-grade bonds traded each day equates to $4 million in savings — or just over $1 billion annually. The opportunity is much higher in less liquid OTC [over-the-counter] products, such as high-yield corporate bonds, emerging market debt and structured credit,” according to Greenwich Associates.
“Today, firms can use tightly integrated enterprise trading technology that allows buy-side trading desks to trade more, achieve better executions, and do it at lower cost,” says Kevin McPartland, head of research for market structure and technology group at Greenwich Associates, and author of the new report. “Given the current pressure on hedge fund fees and performance as compared to passively managed funds, reducing costs while increasing efficiency and execution quality is more important than ever.”
Ultimately, the electronification of fixed-income trading over the past five years “and the $1.25 million spent by the typical buy-side firm last year on fixed-income technology alone — has proved to be less about removing human traders and more about increasing the capacity of those currently in place,” McPartland says.
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