A new report from Coalition Greenwich found that buy-side comments with respect to MDPs reflect that the ability to access dealer quotes while keeping them in competition, helps optimise trading.

The growing use of MDPs from the buy-side is driving electronic trading overall and supports their growing focus on best execution.

Over the next year, 34% of respondents stated that their use of MDPs would increase, while conversely, only 5% thought there would be a reduction.

Comparatively, only 16% stated they would increase their use of single-dealer platforms, with 24% stating they would reduce their use of SDPs.

The usage of manual forms of trading, such as chat and voice, are also anticipated to decline, with 23% expecting to decrease their use of chat and 31% decreasing their use of voice in the next year.

“Using electronic execution methods provides value beyond a single trade execution. For example, it is easier to store and capture data about the bids received from dealers when receiving them electronically,” said Coalition Greenwich in its report.

“This ultimately helps a buy-side firm evaluate a broker, whether they executed a particular trade or not.”

When evaluating a firm’s panel of dealers, a buy-side desk may take into consideration various reasons why it may redirect its flow from one to another. Coalition Greenwich found that there were two key reasons why a trader may reduce flow to a dealer: namely, pricing and quality of institutional coverage.

When asked why the buy-side might redirect trade flow, just over 40% of respondents noted pricing as a key consideration. This comes as no surprise with growing concerns from the buy-side about best execution and investments in tools such as TCA to help evaluate their counterparties.

The quality of sales and relationship management was the second highest reason noted by respondents, with 22% citing it as an important element.

The common thread connecting the FX discussion on dealers and MDPs is competition. End users want their dealers in competition with each other to both receive favourable pricing on individual trades and reduce dependence on an individual counterparty, noted Coalition Greenwich.

Elsewhere in the report, Coalition Greenwich found that single-dealer platforms (SDPs) will continue to play a role in the FX trading ecosystem, particularly for complex trades and structures.

However, it was noted that MDPs are likely to remain the preferred choice for routine trades and spot execution.

“MDPs offer a range of benefits, including ease of use, workflow integration and best execution,” said Stephen Bruel, senior analyst on the Market Structure and Technology team at Coalition Greenwich.

“They are an attractive option for buy-side traders who want to optimise their trading and achieve best execution.”

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Jesse Forster

When it comes to the industry’s opinion on “new innovative trading venues”, the latest Coalition Greenwich report found that an overwhelming 91% of both US low-touch brokers and their buy-side clients have between “a little” and “a lot” of interest in the venues. 

This huge number is understandable given the significant amount of all US equity volume being executed on ATSs. With institutional trading contributing around 33% of overall equity market volumes, the conclusion is that half of all liquidity needs are currently being fulfilled on ATSs.

Speaking to the rise of ATSs – thanks in large part to their established focus on execution quality above all else – one electronic trading head based in the US told Coalition Greenwich: “They solved for performance, now they just need to solve for liquidity”.

Read more: Data arms race heats up as venues and vendors eye buy-side business through new initiatives 

Delving deeper into the data, 38% and 53% of US low-touch brokers showed “a lot” and “a little” interest respectively, compared to 28% and 63% respectively on the buy-side client side.

Speaking to the motivators, one surveyed sell-side head asserted: “The buy side wants to see us trading there. They expect us to be experimenting with them with different types of orders under different conditions in different times of the day.”

This is arguably a straightforward supply and demand situation. With market sentiment shifting, many across the market are crediting the new generation of traders with driving change thanks to their new age thinking and openness to new ideas and innovations.

Trading venues are continually having to adapt as liquidity gets more and more fragmented – a key challenge when it comes to ATSs. However, it is apparent that key market participants on both the buy- and sell-side are highly cognisant of the importance of not falling behind the curve of change. 

As the landscape develops at an ever-faster pace, it is only logical that so too will the means by which trading is executed.

Jesse Forster, head of equity market structure and technology at Coalition Greenwich, explained: “ATSs are incubators in a market structure laboratory, with less stringent rule sets than exchanges. The ATSs gaining traction today have sparked a hunger for further innovation, paving the way for the next generation of groundbreaking trading venues to emerge.”

Coalition Greenwich’s ‘the innovators: how and why alternative trading systems succeed’ study was based on feedback from Q3 2024 wherein interviews were conducted with equity market professionals in the US working at ATSs, exchanges, asset managers, broker-dealers, fintech providers, and industry associations.

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Roughly a third of respondents plan to bolster their algo sales and desk coverage, while a quarter are looking to boost their execution and analytics consulting, on-desk trading assistant, and trade operations or algo support headcounts.

Coalition Greenwich found that the rest have decided to remain steady, however various respondents did indicate that they plan to expand in the longer-term.

With growing innovation in the space, one study participant noted that they expect a reduction in headcount over the long term as desks replace traders with artificial intelligence (AI) as a means of capex reduction. They did however note that the industry isn’t necessarily there yet.

“While optimistic, low-touch traders are still grappling with the challenges of race-to-zero commissions, tightening regulatory requirements and data-driven, buy-side clients. However, like any resilient organism, they have evolved to survive, honing their skills and adapting to the shifting landscape,” said Coalition Greenwich in its report.

“Those who invest in the latest human and technical resources as well as the skill sets needed to succeed will be well-positioned for a bright future. The playing field is wide open, and those who adapt will thrive.”

With ongoing pursuits for innovation and enhancements in equities trading, Coalition Greenwich found that electronic sales traders are more frequently searching for new venues to differentiate themselves.

Almost 40% of respondents emphasised a strong interest in more innovative trading venues, with another 53% showing some interest.

Read more: PureStream: The disruptor venue determined to make waves in the institutional liquidity landscape

Elsewhere in its report, Coalition Greenwich highlighted that “one can no longer talk about the future of electronic trading without mentioning AI”.

The electronic sell-side was found to believe AI will have a notable impact on electronic equity trading in the coming years, particularly in real-time algo optimisation (66%), venue optimisation (47%) and compliance/surveillance (38%).

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When asked specifically what ‘proper coverage’ means, one respondent noted that this meant brokers who put their best foot forward without being asked, with other respondents noting the importance of continuity.

Nearly half (47%) cited operations, middle- and back-office and settlement issues as another key pain point. Coalition Greenwich did, however, note that this is a frequent area of concern among asset managers, spanning the entire asset class spectrum.

With the move to T+1 already in full swing, respondents noted that the acceleration of settlement times is expected to present a much larger issue operationally in the future.

Read more: T+1 settlement: The seismic post-trade change impacting the trading desk

Possibly related to these concerns, Coalition Greenwich found that nearly half of respondents (49%) want separate coverage relationships with their brokers’ high- and low-touch desks. A quarter said they prefer a one-touch/hybrid coverage model, while 26% said it depends on the broker.

Looking at the most important attributes of high-touch trading counterparties, the report found that 87% of respondents place block trading and the ability to source natural institutional liquidity as a key criteria.

The second most highlighted attribute (70%) was customer service, including proactive order colour, emphasising growing demands for improved ease of use and reliability.

On the other end of the spectrum, when evaluating a new broker’s low-touch platform, the report found that 68% of the buy-side seek provable execution quality metrics/transaction cost analysis (TCA) results.

The ability of the low-touch platform to cross blocks or source natural liquidity with the high-touch desk with another key area of focus for traders (53%), as well as the reputation of the low-touch desk (47%).

“Even though it’s becoming an increasingly electronic world, the basic hierarchy of buy-side needs hasn’t changed: Provide reliable offerings, whether human- or electronic-based, that perform well and integrate with their workflow,” said Jesse Forster, senior analyst at Coalition Greenwich Market Structure & Technology, and author of the report.

“Back this with high-quality support for when things invariably go wrong. That’s it—that’s the ask. The playbook’s wide open for those who wish to study it.”

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The majority of surveyed participants (65%) told Coalition Greenwich that their primary technology priority for this year was automating parts of the corporate bond trading process.

The US corporate bond market saw trading volumes increase by 34% year-on-year, with average daily trade count up by 20%. Meanwhile, average ticket size was down 16% in the same time frame, and investment grade (IG) bid-ask spreads were down 44%.

These figures, although largely positive for investors, have resulted in the dealer community being required to become increasingly efficient in their client liquidity provisions.

According to the report, the push toward automation is twofold. Institutional investors are more frequently expecting near-instant liquidity when trading corporate bonds, with more than 40% of the total notional volume of IG bonds now traded electronically.

The only feasible way to meet this need is to price and quote bonds faster than a human could via point-and-click, hence growing demand for automation.

Another angle is the market’s newfound transparency which is making it more difficult to for dealers to capture the profit margins they previously did on each trade. As a result, the same number of traders or less are handling an ever-increasing amount of client orders.

For traders to handle more clients and increased orders, automation is the only way to achieve this while still maintaining the same level of service they always have, Coalition Greenwich argued.

Automation can also allow traders to spend more time on areas that are more manual such as gathering/providing market colour and handling block/portfolio trades.

The report did note that the push towards automation is largely driven by the largest global dealers and non-bank market makers. However, third-party technology providers are increasingly able to offer highly customisable auto-quoting and auto-execution solutions that allow dealers with less technological resources to compete. 

“The fixed-income market is moving into the next phase of electronic trading in which trade execution is not simply electronic, but fully automated,” said Kevin McPartland, head of research at Coalition Greenwich Market Structure and Technology, and author of the report. 

“Interest in fully automated trading is not limited to the biggest corporate bond liquidity providers. Nearly two-thirds of corporate bond dealers see increasing automation in the trading process as a top technology priority for 2024.”

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Surveyed risk professionals were nearly split in their responses to feeling either confident or somewhat confident with their risk management processes during normal market conditions.

However, looking at future market shocks, 37% said they are prepared, while the majority (61%) said they were somewhat prepared. Only 2% of surveyed risk professionals said they were not prepared at all.

Confidence in risk management practices plays an important role in the survey’s findings, according to Coalition Greenwich.

In its report, Coalition Greenwich stated that risk professionals on both sides of the market are less confident about the metrics they are using to analyse risk, even in typical market environments.

A large portion of managers are only somewhat confident when measuring value-at-risk (VAR), exposures and liquidity across several asset classes and products.

Looking at the top challenges in risk management processes, the aggregation of all the data necessary for managing the risk of firms’ portfolios was highlighted as the biggest concern (45%); looking at multiple systems to get an overall picture of risk was noted as being another issue (39%); while the complexity and manual nature of building scenarios rounded up the top three biggest challenges in risk management processes (32%).

Professionals who are confident with their risk management practices still struggle to aggregate the necessary data to support comprehensive analysis of risk exposure, due to risk data being siloed and challenging to combine, which ultimately results in inefficiencies, the survey found.

Elsewhere, it was noted that some risk managers still rely on multiple, disparate systems to view risk across all their books, with some instances where they can’t establish a single view of enterprise risk especially for more nuanced asset class exposures.

The report also highlighted the troublesome and overly complex nature associated with building scenarios which are used to assess a range of future risks.

The survey found that in-house system users struggle more than those using third-party platforms in this respect, perhaps because of the pre-canned tests or stress-testing modules that are often inherent to vendor systems.

“Financial service firms are in a race to keep up with the increasing complexity, speed and scope of today’s global marketplace,” said Audrey Costabile, senior analyst at Coalition Greenwich Market Structure and Technology, and author of the report.

“Risk management practices are set to evolve as unforeseen events shape the use of risk management tools and analysis methods. Data is a key element of this shift with managers seeking ways to acquire, aggregate and normalise data to run on larger and more complex datasets.”

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This is reportedly down to two main factors: the readiness of the asset class, and improved attitudes towards electronic trading.

The report confirmed that this year has shown clear evidence of the trend, with e-trading seeing a surge in Q1 wherein 44% and 29% of investment-grade bonds and high-yield bonds respectively were traded using electronic means. 

“The journey to more electronification is very different across participants, with most embracing at least some e-trading in their workflows today,” said Coalition Greenwich. 

However, while technological adoption continues to rise – across all asset classes – fixed income traders are encountering increasing pain points associated with technological evolution in their bid for more efficient ways to trade.

Common issues such as running multiple applications simultaneously and a lack of interoperability when it comes to analysing data from several sources remain prevalent. 

In addition, “factors including cost and quantifiable return on investment (ROI) still hinder traders who are considering the adoption of new trading technology,” said Coalition Greenwich.

Read more – The TRADE predictions series 2024: Fixed income, innovation and electronification 

Notably, respondents confirmed that core execution management system (EMS) functionalities continue to be a key focus for fixed income traders, as they seek to adopt more advanced trading techniques.

Currently, only a small percentage of fixed-income investors use EMS to transact fixed-income securities, however Coalition Greenwich’s latest report confirmed that sentiment is swaying towards more increased adoption and use in the year to come to combat these points. 

These findings mirror those found in The TRADE’s own EMS survey findings from its 2023 edition, which has been seeing an increasing numbers of responses from fixed income traders in recent years.

Delving into this deeper, the report asserted that “desired functionality within an EMS serves as a good proxy for how the buy-side would like their trading workflow to improve”. 

Specifically, 63% of fixed income traders highlighted access to liquidity from a single blotter as the most attractive functionality, closely followed by 51% of respondents confirming that aggregation of market data from multiple sources/formats was the number one desire.

This is closely linked to the ever-present conversations around fragmentation, wherein a single blotter can serve to simplify impacts on trading workflow. In addition, market data aggregation – which is centralised and standardised with EMS technology – can, and does, ease the operational side of trading.

“Buy-side users of EMS technology are huge advocates for that approach to trading and encourage peers at other firms to take the plunge. For those that use them, EMSs serve as a hub for the buy-side, the trading venues and their dealer counterparties, allowing traders to discover and negotiate prices in an efficient manner without turning to different platforms and systems,” concluded Coalition Greenwich.

The ‘on the verge of change’ report includes responses from 70 US buy-side professionals from front-office fixed-income roles. 

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Jesse Forster

The next most important priority was access to dark pool liquidity, with 73% of UK respondents and 61% of those in Continental Europe highlighting it as a key factor in selection processes.

“People on dealing desks talk, so you leverage dark-seeking algos instead. You don’t want to see it [your trade] popping up on Twitter,” one market structure specialist told Coalition Greenwich.

Other important considerations amongst respondents included: ‘proven execution quality of algorithms’ (up 5% since 2022, now at 65%), quality of algorithmic trading consultancy (also up 5%, now at 53%), and, in Continental Europe specifically, fast trade execution/low latency (35% in 2023).

This latest finding seemingly confirms that while the arms race for speed is over in the UK, the war wages on across Europe.

Speaking to the significance of this research, Jesse Forster, senior analyst at Coalition Greenwich market structure and technology, said: “In both regions [UK and Europe], managers are rewarding their top algorithmic broker with a whopping 28–29% of their electronic order flow.

“[…] 56% of algo flow from UK managers and 64% from continental desks are ending up with their top three providers.” 

Last year, UK managers traded over a third, 36%, of their order flow by notional value via algorithmic strategies – a number which is expected to grow over the coming years – while high-touch sales trading fell by 3% to 34% and is predicted to see a continued downturn in the future.

However, Continental Europe saw an increase in high-touch usage by the same margin, with e-trading on the up and 45% of their flow expected to be through algos. 

Elsewhere, increased concentration of equity trading volumes is being expedited by a continued transition of trading volumes to electronic execution.

The European equities market saw the total amount of equity commissions earned by brokers on trades fall by 14% in 2023, to $2.21 billion as investors’ commissions flowed to fewer brokers.

“Reduced commissions represent a growing challenge for brokers, especially at a time when investors are directing an increasing share of their existing “wallets” to their top brokers. The continued transition of trading volumes to electronic execution seems to be accelerating the concentration trend,” said Coalition Greenwich.

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According to the report’s findings, this growing demand for electronic execution is driven partly by institutions’ search for natural block liquidity in small- and mid-cap stocks.

These stats echo another recent report which found that 37% of total 2023 equity trading volumes in the US were executed through algorithms and/or smart order routers, with this figure expected to reach 40% in the next three years.

Read more: E-trading platforms experienced increased share of US equity trading volume in 2023

Asset managers and brokers have been driven to automate their trading workflows and accomplish more with less to cope with reduced commission rates, budget restrictions and smaller teams. As a result, electronic and/or algorithmic trading has seen usage increase.

Algorithmic strategies and buy-side to buy-side crossing networks have experienced steady growth, rising from 28% of volumes in 2021 to 32% in 2023.

High-touch trading saw a brief uptick to 61% in 2021 and 2022 – which was attributed to increased volatility and work from home environments – however, this has started to decline, levelling off at 58% in 2023.

Coalition Greenwich found that Canadian managers expect electronic trading figures to surge to 38% in the next three years, while high touch volumes are expected to decline to 54% in the same period.

The report found that the highest commission-paying managers already trade an estimated 35% of their Canadian equities flow via electronic routes and expect this to reach 41% in three years.

“The Canadian equity market is undergoing a transformation marked by an embrace of electronic trading with an onus on sourcing liquidity in difficult-to-trade small and mid-cap names,” said Jesse Forster, senior analyst at Coalition Greenwich Market Structure & Technology and author of the report.

“As electronic trading matures in Canada, other factors are gaining prominence. We are already seeing an increased emphasis on more specific factors like quality of electronic sales trader coverage, algorithmic consultancy and the ability to customise algorithms.”

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New data from Coalition Greenwich found that electronic trading platforms captured 44% of buy-side US equities order flow in 2023, up from 42% in 2022.

Roughly 37% of total 2023 volumes were executed through algorithms and/or smart order routers – an increase from 35% – while 7% was directly routed to crossing networks, which remained consistent year-on-year.

According to Coalition Greenwich, managers expect the trend to continue to increase, projecting algorithmic trading to reach 40% and crossing networks to increase to 8% over the next three years.

Electronic trading has even larger usage among the highest commission-paying institutions, with 59% of their flow by notional value channelled through algorithms and 7% through crossing networks.

Although routing to electronic trading continues to rise, high-touch sales trading continues to gain traction, with these highest paying managers increasing high-touch trading by roughly 5% year-on-year.

Coalition Greenwich noted that this suggests a potential tipping or saturation point, showing that electronic trading could encounter resistance at around 60% of flow traded value.

With increasing electronic execution from the buy-side, these firms are also reducing the amount of brokers they use to trade US equities overall.

Buy-side desks have reduced their equity trading counterparty lists slightly to an average of 31 brokers, a reduction from 31.5 in 2022.

“Sourcing natural liquidity remains the buy-side’s primary determinant in allocating a diminishing commission wallet, and desks are reducing their broker lists while concentrating flow to their top providers,” says Jesse Forster, senior analyst at Coalition Greenwich Market Structure and Technology.

“There is one important exception: higher commission payers are expanding their lists to an average of 44.1, indicating a unique trend among top-tier institutions.”

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