Execution Consulting vs Broker-Supplied Algorithms
Forex trading, by its very nature is analysis heavy. It requires a certain predictive ability and technical acumen that can only be achieved through careful statistical analysis. In recent years, there has been significant growth in the availability of software packages that aggregate data and exchange rates, creating charts of historical rates and data that help traders make pre-trade strategic decisions.
This growth comes as a result of the fact that retail traders and fund managers alike are demanding more from there brokers, in a market where data is heavy and where maintaining an edge is vital. Of those packages that have seen the greatest growth, Execution Consultation and Broker-Supplied Algorithms, are two of the most prominent and competitive, which is down purely to the nature of the product characteristics that they provide.
This is much more than just a pretentious buzzword term. Execution Consulting is a term given to a powerful set of trading support services for fund managers who require or demand more assistance from their broker. Fund managers and brokers have always sought a tenuous balance in their relationship, balancing the desire for additional advice and input with the desire for the lower trade costs that the more "hands-off" trading approach provides.
Depending on the provider, Execution Consulting can encompass a series of services and advice that include expertise on market conditions, alternative trading platforms, and algorithmic trading with the aim of improving data, technology and analytics. In most cases a series of pre-trade analytics, tools and alerts are provided, along with a selection of on-demand services, such as analysis and optimisation of trading systems and market commentary.
Broker Supplied Algorithms
Broker-dealers are commonly recognised as experts in trading, but their expertise is often siloed and confined to either market conditions or algorithmic advice. For brokers at algo desks, their contact with fund managers and investors is generally limited to developing and providing complex mathematical algorithms designed to identify ideal market conditions for buy and sell orders.
However, many clients are becoming increasingly sceptical of the benefit of this traditional approach to the broker-manager relationship. There is growing sentiment that the approach is flawed and that there is only a minor and superficial difference between these algorithms and those used by most major brokers. Indeed, a survey by Bloomberg found that 52 percent of all fund managers believed that algorithms had become just another commodity, and that the ideal relationship with a broker should focus instead on more "high touch" consulting such as execution consulting. In another survey by the Aite Group, Execution services are considered the top differentiator by 87% of broker-dealers, exceeding liquidity management and algorithmic trading.
It is certainly possible that the future of Forex brokerages will be fundamentally changed by the advent of execution consulting as the surveys discussed above would suggest. Rather than splitting brokers into high and low touch firms, execution consulting allows traditionally quantitative brokers (low touch) to develop a more personal approach that will satisfy less quantitatively minded fund managers and individual investors.
In a study carried out in 2012 by Aite Group it was identified that the provision of algorithms was now thought to be less important for broker dealers than execution consulting. However, execution consulting will only amass the staying power if it can be shown to provide meaningful results in the form of increased returns. Despite the personal preferences of different traders, they are united in their desire for greater profit and their willingness to switch brokers if they believe that their returns would be higher elsewhere.
This post was written by Daniel Lindsay.
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