Courtesy of AdvancedTrading Contributor Phillipe Buhannic

Editor Note: This article is endorsed by MarketsMuse sponsor OMEX Systems, Inc.

Buy-side clients need to understand that when they trade on a broker-sponsored platform, they are paying for these systems, whether that payment comes in the form of commissions, licenses, or widened spread. Therefore, the most important thing the buy side should do is to think like a customer.

The last year’s market deterioration made things difficult for brokers, who are seeing tighter spreads, fragmented flow, smaller trade sizes, and compressed commissions. Brokers now face the most difficult operating environment in recent memory, with decreased market liquidity, increased message traffic and lower order volumes from clients.

Brokers also find themselves in an adverse situation, having over-invested in a number of areas, including their trading infrastructure, their capability to generate algorithms and their ability to process trades. Most broker’s capabilities vastly surpass the current needs of their clients.

From Bad To Worse
And just when you thought that things could not get any worse for brokers, they are now increasingly subject to regulation seeking to promote transparency. Brokers also have to deal with plan sponsors who need to justify more effectiveness in trade handling, and, more generally a buy side that wants to clear up the inherent conflict of interest of broker-sponsored platforms.

As broker-sponsored platforms face an uncertain future, sophisticated buy-side firms have to answer difficult questions about how they manage the associated risks of trading on these platforms … and whether those risks are worth taking at all.

Although broker-sponsored platforms can be conceptually acceptable, investors need to protect themselves against the risks that these systems could potentially generate, such as significant market impact, limitation of transparency and higher, undisclosed, transaction costs.

Top 10 Buy Side Concerns
Here are the the top 10 issues every buy-side trader needs to be mindful of to ensure efficient and effective trading on their broker-sponsored platforms: Continue reading →