The past decade has witnessed the wholesale electronification of global trading. The term “low touch” was coined to describe exactly this and the electronic routing of client orders to markets with the minimum of intervention from their broker. This meant that the value add of the sales trader was increasingly denuded and the key differentiators became simply cost and market coverage. Interesting, then, that at the International Trader Forum in Madrid last week a number of high profile buy-sides were talking about a return to full service, high touch brokerage. This is because a combination of persistent low volumes and increased venue complexity are making it harder and harder to get orders filled. On top of this, the desire to avoid predatory HFT activity has meant that firms want to know exactly who they are dealing with and the likely outcome of showing their hand at any given venue. This has always been the preserve of the high touch world, where managing the relationship was the key to success – liking and disliking different counterparties and having different circles of contacts to interact with depending upon any given trading objective. This is what traditional brokers were able to provide to their clients and, in some cases, still do. But now there’s a new game in town. In parallel with the electronification of markets, the rise of social media has shown how relationships are now forged, maintained and evaluated electronically.
The combination of the two creates some intriguing opportunities that might finally prove how social media and financial markets are supposed to work together. Market pioneers are starting to make this connection – such as Tony Mackay (founding CEO of Chi-X Europe) with MarketBourse – but you wonder if an exchange is even needed at all. Historically exchanges provided a physical meeting place for interested parties to engage in price discovery, but increasingly these same parties can now find each other in cyberspace. So maybe the return to high touch trading is achieved by overlaying social media concepts on top of the low touch networks that now proliferate the industry. This would enable different counterparties to not only find each other but also build and extend their relationships based upon shared interests or capabilities.
However all this pans out, the current difficulty in finding suitable liquidity means that a return to more relationship-based trading looks a distinct possibility. The use of social media in this way could provide high touch service but without the high cost.
The difficulty with social media is the tracking, retention and management of in accordance with communication regulation. Installing a simple IM solution can take up weeks of technology and compliance resources many of whom are already stretched thin. Add the complexities of social media this could turn into major efforts taking years. What one would need is a social media aggregator, acting as a hub to capture, store, retain and lock down communication leading out to the sites. As well as corporate policies not allowing direct access to the actual sites which the aggregator touch.