Best execution and technology matter for brokers, but so do relationships

Key Takeaways

• Client service is key in interest rate derivative relationships
• Brokers must complement technology spend with talent
• Supporting buyside will lead to success in competitive markets

Fintech dominates the story of best execution in today’s markets, with participants under pressure to offer the latest and most effective systems and processes.

But in the dash to automation, the importance of a putting a human face to trading is at risk of being forgotten.

Research from Coalition Greenwich, which surveyed more than 350 buyside interest rate derivative (IRD) traders, reveals the importance of maintaining strong relationships between dealers and their clients.

The technology spend by IRD firms is growing more quickly than many other areas of their businesses, including operations and administration but is that resource being put to the best use?

Improving stickiness

The report reveals that while some of that spending is focused internally, for example on risk management technology, intermediaries also suggest that they view technology as a way to “improve stickiness with their clients via a focus on client portals and other similar tools”. In other words, technology must be about improving the customer experience as well as the dealer’s.

The research states: “How the buyside interacts with a dealer is partly a human story and partly a technology story. Technology should enhance interactions but can impair the relationship if not up to par.”

In an ever more competitive space – the biggest four interest-rate swap dealers accounted for 63% of overall dealer revenue in 2023, up from 61% in 2022 – firms must be on top of their game across the entire offering if they are to survive.

That means ensuring the best talent alongside the latest technology.

Indeed, as the report states competition for talent, and the need to constantly invest in technology are among the forces that can “erode the quality of service if not managed closely”.

The research adds: “If a dealer loses top traders or underinvests in technology, their clients will notice and can redirect flow to other banks.”

Multiple relationships

If they want to secure the best pricing and optimum liquidity, the buyside must engage with multiple brokers for their IRD trading.

There are multiple reasons why a trader might switch broker, but when asked what was most likely to negatively impact trading relationships and ultimately result in reduced flows to a dealer, the emphasis from the buyside was not on technology but rather pricing and the effectiveness of the coverage team.

More than a third (34%) of respondents say pricing issues will drive them to the competition, while 31% say sales and trading coverage determines with which firm they interact.

Importantly respondents to the survey say that despite informing their brokers about pricing, they “don’t always see a behaviour change”.

As the research notes, ‘end users certainly don’t view quotes in a vacuum, rather will make statements such as “their recent pricing competitiveness falls behind competition” to emphasize the point’.

IRD firms that want to guarantee an edge must be equipped with individuals who listen to their clients and have the authority and motivation to respond in line with their client’s expectations.

Pricing and talent intertwined

The buyside is clear in its recognition of exceptional talent, noting that pricing and quality of traders can also be intertwined. As one respondent said when a dealer “terminated a lot of good traders,” “pricing [became] not competitive.”

The loss of talent was also a constant theme. It does not go unnoticed by clients when it occurs and causes end users to place a spotlight on the new trader’s performance.

However, the report notes: “Pricing will remain an issue for the dealers though, of course, revenues and profitability are top of mind and not all clients will get the prices they want.”

The focus on talent also extends to coverage which the report says the buyside assesses more qualitatively.

End users ask for “more touchpoints, more interactions with the trading desk and the research team” and notice “deterioration in their service.”

The customer service challenge

But the challenge for firms lies in delivering less expensive services with improved coverage.

This, Coalition Greenwich acknowledges, is “not an easy balancing act for the dealers, given the financial implications of regulation” and stresses the need to manage the economics of both the desk and the individual client relationships.

The research reveals the import role brokers play in supporting the buyside as they seek to provide best execution.

It notes that the buyside is on a journey to improve and optimise their trading, and to focus on their own technology, portfolio management, research, operations, and trading processes.

But brokers are crucially important in enhancing the buyside’s efforts through a focus on pricing, improved service quality and technology.

As the report notes, not every client will get all they want from their brokers and many brokers may have different priorities, but “responding to the buyside’s wish list can help sustain a dealer’s IRD franchise”.

Derivatives trading firms globally are under pressure as more stringent regulations, intense competition and lower commissions squeeze revenue growth and profitability.

For businesses to thrive in such conditions, and to handle more volatile markets while providing top-end service, they require technology that automates mundane tasks and integrates operations from the front-office to the back-office, thereby allowing their staff to focus more on their customers’ needs.