Voice trading and best execution

I remember seeing a study a few years back that said that buy-side firms didn’t always want immediate trading.  One of the arguments was that if you’ve spent months researching and defining the investment strategy for a new fund, it would seem a bit irrational to then expect all of the constituents to be traded in milliseconds.  The study graphed how long fund managers would prefer to wait to get a better deal, and they were prepared to wait days – not seconds.

The more commoditised the item that you’re trading, the more it lends itself to automated trading.  Spot FX has three dimensions – what currency, what volume and what price.  Equities are similar – which issuer, what volume, what price.  Bonds are more complex and have more dimensions – maturity, interest rate basis, etc.  And then there are the really “complex instruments” and structured products.

The more complex the instrument, the more the dealer can negotiate.  Immediacy generally means “non-negotiable” – you get the price and size that’s available in the market at the time.  Immediacy doesn’t necessarily mean “best”, as reflected in the buy-side study mentioned above.  So immediacy doesn’t necessarily mean “best execution”.

The idea of “dark pools of liquidity” has always been here – it’s the basis of OTC trading.  OTC trading has always been mainly voice trading.  One big reason is that voice trading gives you the ability to negotiate the deal in the best interest of your client.  Computers don’t give you that ability.

Technology has changed, but the clients’ expectations and the market regulators’ expectations haven’t.  If you can’t get best execution for your client using computers, then they expect you to go to voice and start negotiating.