The Internet was abuzz in late March after Reuters reported that Deutsche Bank was poised to hire dozens of equity traders to bolster its operations in the U.S. and elsewhere. The news came as a shock because many other financial services firms — Bank of America Merrill Lynch, Citigroup and Credit Suisse among them — have been scaling back their trading staffs after years of falling volumes and plunging revenues.
Does the big German bank know something the others don’t? If it does, it’s not saying: Deutsche sources declined to comment on the Reuters story. But executives at other global banks are quick to acknowledge that the future of the sales trader — both traditional and electronic — is not as bleak as it may appear at the moment.
“High-touch trading is just as important as ever, and so is electronic trading,” affirms Luiz De Salvo, co-head of Americas cash equities trading at J.P. Morgan Securities in New York. “While our electronic-trading business has grown dramatically, it has also enabled our high-touch traders to leverage those tools for execution so they can focus on the really important client situations and provide the best liquidity and prices.”
Brian Gallagher, Morgan Stanley & Co.’s co-head of electronic trading, concurs. “As the liquidity of the market continues to evolve, we have seen a resurgence in the importance of a high-touch approach as our clients seek out the best access to liquidity and capital,” he observes. “While electronic trading has seen significant growth over the past few years and continues to be important to our client base, the sales trader remains a key part of helping clients find liquidity, utilize our capital and minimize impact in a lower-volume environment.”
According to Gallagher, buy-side trading decisions over the past few years have centered on three main factors — cost, anonymity and liquidity — each of which has its own value proposition. “High-touch trading can offer access to a different form of service, higher cost, access to block liquidity but potentially less anonymity,” says the New York–based executive. For its part, “electronic trading can offer lower explicit cost, anonymity and liquidity access that can be constrained to exchanges and alternative trading systems.”
The styles are not mutually exclusive, however. “Increasingly, we are working with clients to bring elements of high touch and low touch together so that they have access to the optimal liquidity and high service with minimal information leakage,” Gallagher says.
Which firms offer the best execution and trading services — high tech, high touch or both — for U.S. equities investors? To find out, Institutional Investor asked buy-side traders, market structure analysts and other financial professionals to evaluate their service providers on a dozen attributes, ranging from access to unique liquidity to risk management. The result is the 2016 All-America Trading Team, our updated and expanded ranking of the U.S.’s top brokerage firms.
Morgan Stanley leads this year’s team, earning a top-three position in 11 of the 12 categories (missing out only in Analytics). Goldman, Sachs & Co. and J.P. Morgan share second place, with nine positions each, while Bank of America Merrill Lynch lands at No. 4, with five spots. These results reflect the opinions of 280 investment professionals at 232 firms that paid an estimated $5.28 billion in commissions for U.S. cash equities last year.
Click on the Leaders link in the navigation table at right to view the full list of ranked firms. To see the top-ranked service providers in each category, click on the attribute name.
Survey participants could also vote for the sales traders and electronic-trading salespeople whom they feel provide exceptional service. Morgan Stanley lays claim to three of the top-five sales traders: Michael Cohen is No. 1, while Derek Johnson and John McCusker capture fourth and fifth place, respectively.
Cohen “has done an excellent job of representing our firm internally and is always both aggressive and proactive as it relates to connecting us to product specialists in the firm or facility trading flow,” attests one backer.
(Unless instructed otherwise, II keeps confidential the identities of survey participants and their firms to ensure their continuing cooperation.)
Brendan Grady of Barclays Capital lands in second place on this roster. “Brendan sets himself apart from other sales traders by always taking the extra time to respond to client requests,” says one buy-side counterpart. “He goes above and beyond with his morning emails, where he takes an anecdote either from history or his personal life and then relates it back to the markets. It’s Wall Street Journal– or New York Times–worthy.”
Among electronic-trading salespeople, no one is more highly regarded than Charlie Whitlock of J.P. Morgan. “Charlie is a consummate professional who has been driven to bring the full services of the broker-dealer to clients,” reports one senior buy-side trader who is based in Boston. “He doesn’t constrain himself by product and is willing to go the extra distance across products and assets. Charlie kicks down doors and doesn’t take things too personally. He has very thick skin, which is a must in this business. I love his persistence.”
Jefferies is home to the remaining two of the top three in this category: Katherine Sullivan and Anthony Pallone. Matthew McGarrity, senior equity trader at CBRE Clarion Securities in Radnor, Pennsylvania, has worked with Sullivan for the past three years. “Kat consistently provides us with excellent insight and service, whether it be through her knowledge of the Jefferies electronic-trading strategies, detailed analysis of market structure or intraday market commentary,” he says.
For rosters of the top salespeople by type, click on Sales Trader or Electronic-Sales Trader in the navigation table at right.
William Bell Jr., a veteran of Lehman Brothers and then Barclays, joined Jefferies in the summer of 2014 as global head of electronic and program trading. “One of the things I noticed was that the role of the electronic salesperson was more reactive, responding to client requests rather than providing some of the market color and other services offered by the traditional sales traders,” he recalls. He set about restructuring the department so that investors receive the same level of attention. “We’re agnostic as to how we cover you. We want to align our services with the clients’ needs. Regardless of the execution vertical they want to use, we want to be there.”
Jefferies’ trading revenue has shown strong growth over the past few years, thanks largely to a recent surge in activity in its electronic franchise — more than 350 percent over the past 18 months, Bell notes. “Electronic trading should really account for one third to 40 percent of overall revenue,” he believes. “We’re constantly working to find the right balance between high- and low-touch trading.”
Bell has noticed that when market volatility is high, clients gravitate more toward electronic trading. “In a low-volatility environment we tend to see more interest in the high-touch approach,” he adds, which is why it’s important for firms to be great in both.
“Clients feel comfortable with us because we have a neutral lens, owing to our conflict-free routing and having no ATS,” he says. “The secret to success in the electronic world is very similar to that of the high-touch approach: helping clients find the right strategy and assisting them as they navigate the market.”
Gallagher echoes that sentiment. “For Morgan Stanley, putting clients first is one of our core principles,” he notes. “Understanding the approach and goals that a client has to achieve best execution as well as developing a balance within each execution method remains key. Specialization in client coverage across voice, program and electronic execution will remain core to how we service our accounts.”
Investors are impressed. Morgan Stanley outranks all other service providers in Responsiveness to buy-side needs and concerns, they say. It’s also No. 1 in Block Liquidity and information Leakage Prevention.
“We have invested significant capital in the order-handling and routing systems utilized by both our traders and clients,” Gallagher reports. “For example, our smart order-routing technology is designed to access liquidity in parallel in a manner intended to minimize information leakage and maximize fill rates.”
J.P. Morgan is deemed the best in access to Unique Liquidity, Algorithms and Price Improvements. “We have a diverse set of flows, from our market-leading cash-trading businesses to our top-tier derivatives-trading businesses,” contends New York–based Christopher Berthe, director of synthetic and forward trading for the Americas. “Offering this liquidity back out to our clients is a key component of our business strategy. We are able to do this as we continue to invest heavily in technology, analytics and quantitative research to keep our algorithms, connectivity and execution tools cutting edge.”
Continually seeking ways to do things better, faster and cheaper is crucial in a trading environment that is growing ever more challenging. European regulators are finalizing new rules for unbundling research from trading commissions, measures that will likely bring the issue of costs into sharp relief and have a far-reaching impact on the way global banks do business.
Moreover, in mid-March researchers at Tricumen, a U.K.-headquartered provider of financial market analytics, estimated that investment banks would report a 20 percent decline in sales and trading revenue year-over-year in the first quarter, which is usually the most profitable period for banks and often accounts for nearly one third of their annual income.
J.P. Morgan, which enjoyed record profits of some $24.4 billion in 2015, acknowledged in February that its trading revenue would drop sharply this quarter. Citi announced in March that first-quarter trading income was likely to be down by about 15 percent.
The situation could change if trading volumes return to their precrisis levels, but few expect that to happen.
“We were trading 15 billion shares a day just a few years ago. Now we’re trading at about half that level, and I think that’s the new normal,” says Jefferies’ Bell. “I don’t see us going back to 12 to 15 billion shares a day anytime soon. I would like to be wrong — but I don’t think I am.”
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