Can hybrid platforms give brokers the edge?

ELECTRONIC trading technology has come a long way in a short space of time. It is now crucial to the broking business and, according to research from Execution Noble, offers operating margins of 40 per cent compared with 20 per cent for traditional voice broking. Based on those figures – not to mention the fact electronic systems reduce operational risk and improve market efficiency – it is easy to assume e-broking is crowding out traditional client relationships on the trading floors of the Square Mile.

Inter-dealer broking giant ICAP is among those to have invested heavily in electronic systems, helping to make its BrokerTec a market leader in fixed income trading and giving its EBS platform a big market share in foreign exchange. Rival BGC Partners this week reported a strong performance in e-broking services, suggesting a market-wide rebound in e-broking volumes.

But ask around the City and there is an alternative view which still rates human contact an indispensable part of the broking business. One veteran broker describes the importance of voice broking as “an emotional thing”. Another explains that when the pressure is on, clients naturally demand a personal connection as they want to know what their broker thinks and feels is happening in the market.

“You cannot get that from a screen – particularly when you’ve been staring at it for hours and your eyesight is beginning to deteriorate. With voice broking you get a minute-by-minute contact which is unique,” he added.

Tullett Prebon is one firm which doesn’t separate e-broking from voice broking services because it believes the platforms should be hybrid – offering both a purely electronic interface to trade while retaining the ability to speak to a broker for those requiring human contact.

Paul Humphrey, Tullett Prebon’s chief executive of electronic broking and information, says the majority of customers want to retain a relationship with a voice broker but all clients want the ability to choose between hybrid and pure electronic platforms.

Voice broking allows clients to interact with a live broker who offers market colour, a view on how trends are developing or where the money is going and someone who can then input an order and close a trade. This can be key when markets are volatile.

Whatever a client’s choice of platform, the most crucial factor in any system is liquidity. Driving liquidity towards an electronic system needs to be encouraged among brokers who are liable to feel marginalised by purely e-broking platforms. The hybrid model may mean brokers are more inclined to drive liquidity to the electronic platform. One of the challenges to maintaining voice broking services is undoubtedly coming from regulators who prefer electronically-cleared products to over-the-counter alternatives because of the transparency they offer. But even that attitude may be changing, with the FSA understood to be exploring hybrid trading platforms and the alternatives they offer.