Musical chairs and the world of US sales trading

As the hectic market Close concludes and 5pm approaches, most of the UK’s and Europe’s sales traders begin to wind down for the day, switching off their screens and preparing for the commute home. However, a small community of individuals remain at their desks flying the flag for a foreign land.

These ambassadors sales trade North American equity to a European and UK-based client base, remaining dedicated to the markets well into the evening local time. As a specialist and non-domestic market, success for these sales traders rests firmly on long-term client relationships. The set of skills and network required makes for a limited pool of specialist talent in this field. In this market, inter-competitor poaching is common. When individuals do switch allegiances, it’s usually for a rival institution in the same role. This natural displacement means when one person moves, others follow in a domino effect.

In the last two years, this community has undergone one of these rounds of musical chairs. In September earlier this year, long-term US sales trader Rob Thomas moved from Instinet after seven years to join Stifel as director of US equities sales and trading. Also embroiled in the shuffle was 15-year US equity sales trader, Luke House, who joined competitor BMO Capital Markets from Stifel in the same role this March. Harriet Sand, formerly an equity sales trader at Stifel for almost seven years, also moved to Berenberg this June in a US centric role. The list goes on.

“It is quite often sparked by one person moving or an event of some kind and then it is exactly that, you get that shift of the chairs. If I’m going out to try and hire somebody for the desk, then by and large I’m going to need somebody with a bit of experience depending on the make-up of the desk,” says Sean Taylor, US sales trader at pan-European broker Berenberg.

A specialist market  

It is because this market is non-domestic that it is considered specialist. As one would expect, a non-domestic market differs from a core one across the board, from the most complex nuances right down to the basic elements including how stocks trade, how clients like to trade them, the liquidity landscape and what the visibility is like versus other markets. All of this knowledge makes those already operating in this space valuable commodities that desks are looking to acquire.

“If you want to go and hire somebody who has got experience, knows the client base, knows how to trade that market, then you need to go and find them from the pool of US sales traders. It’s symptomatic of the number of people trading it as much as anything else. This isn’t just specific to the US; you can see this happening in Scandinavian market too for instance. Somebody moves and then number of guys who trade Scandinavia in London shift around. It tends to be more specific to trading a secondary market within a geography,” adds Taylor.

“If you’re trading the UK within the UK that is the core market and there tends to be quite a broad spread of people that are sales trading and covering accounts etc. So in terms of movement there it tends to be a forever changing landscape.”

Taylor’s turn to move chairs came at the end of 2019 when he joined Berenberg as a US sales trader from rival Stifel where he had been head of the division in London for nearly 15 years. Pan-European broker Berenberg has had a North American presence for 10 years and has been trading in the region for six of those. It’s been focused on significantly expanding its sales trading remit in the last two years, seeing 25% growth through the addition of new analysts and sales personnel.

Trust and long-term relationships

North American equity sales traders are, in effect, an outsourced extension of a client’s trading desk, acting as a bridge between the client local time and the foreign market. For this reason, trust and long-term relationships are extremely important.

Sales traders often take responsibility for orders through the UK market close, when clients are also focused on their global portfolios, and through the US market close, which takes place at 9pm UK time when most clients have logged off for the day. They want to leave someone they trust at the wheel, and in order to build up this trust they need to be close by and easily accessible. As a local reference point in their own time zone, clients can easily convey to sales traders based in the UK and Europe what they want. 

“Prior to moving to the sell-side I spent 10 years on the buy-side and seven of those on the trading desk and I always liked to have the brokers I was speaking to quite close. It means you can meet each other more often. It boils down to the relationships,” says Matthew Penfold, director of US sales trading at Cowen. “There’s been a lot of movement [of sales traders] recently but generally it’s been a business where people have historically stayed in seats for a long time. Ultimately, as people become embedded in firms then I think there’s less inclination to move elsewhere.”

Like many of his peers, Penfold joined his current company from a competitor firm, in this case Macquarie Group, where he had operated as a US sales trader for institutional investors for nine years. He joined Cowen as a director for its US equity sales trading team in July last year. Prior to joining Macquarie in 2010, Penfold also served as a US sales trader for investment bank Piper Jaffray for three years.

This embedding effect combined with the essential long-term relationships with clients means those operating in this space are rarely junior. While the rest of the sell-side has undergone significant juniorisation, demand for experience is much higher in the US sales trading space.

So why do these individuals commit to living out their professional careers in another time zone? Charlie Green joined RBC as a North American equity sales trader in 2015 from Cantor Fitzgerald Europe, having previously already operated as head trader at Abydos Capital and in an international sales trading role at Canaccord Capital. According to him, its North America that moves the needle for the rest of the market. “North America is the region that primarily drives global markets. Europe will often wait for the US market to wake up and it’s the risk appetite of North America that will dictate the pace and direction of the afternoon,” Green says.

RBC, as one of the longer standing players, opened its first London branch in 1910 and has served a European and UK institutional client base with an interest in North America ever since.

Miles away

A typical day will involve arriving any time from 9-11am UK time and preparing for the US open at 2.30pm in the afternoon. Like in other markets, most will prepare and distribute a note to the Street including a breakdown of overnight market news from the US. There are peaks in volume at the market Open and Close. Some desks will hand over to an East Coast desk at around 6pm UK time, however, most will continue trading right through to the Close at 9pm UK time.

“In terms of continuity for clients, at RBC we’re accountable the whole time. Ultimately you want to make sure you’re providing your client with simple solutions for their choice of execution. They don’t want a headache, especially after six o’clock in the evening,” says Green.

US sales traders’ days differ in that their minds are constantly straddling the Atlantic Ocean. Ongoing trends impacting the US most significantly have a greater impact on the sales traders covering it. For example, the growing influence of retail investors which has over the last two years continue to boil until eventually reaching a crescendo during the volatility caused by the GameStop saga. According to data by the Securities and Exchange Commission (SEC), almost 900,000 individual retail accounts – up from 10,000 trading a day at the start of the year – traded GameStop in a single day. The event saw shares in the brick-and-mortar shop rise 2,700% across three weeks in January.

Around 60% of US equity flows are now driven by retail investors while only 25% are driven by traditional bottom-up equity investors, according to recent data by JP Morgan, and this growing swarm is a power that US sales traders are only too aware of.

“In the US, we have clearly seen an increasing prevalence of retail trading and the volume this segment of the market brings to the broader tape, a theme of which institutional investors have been very keen to understand more. Along with this year, in particular, the well-publicised outsized moves in meme stocks,” adds Cowen’s Penfold.

Cowen was one of the institutions to launch a new tool aimed at helping institutional investors navigate the growing retail swarm. Named Inaccessible Liquidity Adjustment, the tool gives clients the opportunity to adjust their trading liquidity deemed to be inaccessible due to retail trading activity on a single stock basis by calculating the percentage of inaccessible liquidity for each US security on a weekly basis using a mixture of data from the previous three months collated by the Financial Industry Regulatory Authority (FINRA) and off-exchange data.

Execution

Execution for these sales traders depends on the legal set up of the institution. Some firms will have a legal entity in London and sales traders or their cash traders will execute via this, however, some desks will act purely as an introducing broker and direct orders to a parent institution based in North America. The majority of those based in London are able to execute themselves as many prefer the autonomy.

Like the wider market, execution has a changing face. Sales traders can use anything from risk, capital or algorithms depending on an order’s characteristics including average daily volume, how a stock trades or what the portfolio manager prefers. The increasing prevalence of electronic trading combined with the shifting regulatory and liquidity landscape means something that worked last week might prove unsuccessful tomorrow. This level of customisation has preserved the need for high-touch trading alongside automised solutions. However, the influx of these electronic and algorithmic solutions has also meant that a much larger portion of the wallet has become low touch and clients have greater autonomy over orders.

For this reason, institutions will often have a high-touch desk service for less liquid orders and a comprehensive electronic or algorithmic service for low touch orders with smaller market impact. Berenberg, for example, offers data-driven algorithmic strategies, global portfolio trading, and ETF liquidity aggregation alongside its high-touch service.

“I think clients trading themselves has been a big theme in the industry with much more of the wallet being low touch now,” says Cowen’s Penfold. “Clients are using a Cowen suite of algorithms to trade even high touch orders.”

Cowen launched its suite of trading algorithms and execution products into Europe in January last year, offering a mirrored service to its products available in the US with additional enhancements to help participants navigate the market post-MiFID II. These included Cowen’s ‘heat map’ routing logic technology to improve efficiencies for clients seeking dark liquidity.

“There has been considerable growth towards electronic over the last five years as asset managers face greater regulatory pressures and trading electronically is often viewed as cheaper, with a simpler audit trail,” says RBC’s Green. “However, if larger blocks of liquidity are required, and that is often the case, then in order to achieve best execution a client will have to reach out to those that are able to provide that liquidity.”

RBC offers high touch and electronic execution services. It’s proprietary algo suite includes RBC NOW and RBC Closer which seek liquidity and attempt to achieve the Closing price respectively while managing market impact, and RBC Dark which acts as a dark aggregator and sources liquidity at selected dark venues, among others. These are powered by its in-house smart order routing technology, THOR, which interacts with the algos and with direct market access (DMA) orders, its cash desk and program trades.

North American equities desks in Europe and the UK are usually comprised of two-to-three individuals and because of this, sales traders usually cover the whole breadth of client types that that institution offers services to. While a two-person desk may sound small, as boots on the ground for a foreign sales desk, sales traders based in the UK and Europe only represent a small portion of the operation that can’t be seen in its entirety.

Following Brexit, desk configuration has become more nuanced with certain restrictions applying to certain client types and with all European institutions having to face a European counterpart. This has meant some desks have reduced their numbers to create a more distinct split of business post-Brexit, with individual sales traders focusing their efforts on one side of the channel specifically.

Keep your friends close 

This small and tightly knit community of individuals compete fiercely into the night for the attention of a mutual client base. However, given that this market segment is one with little turnover that relies on long and trusting relationships, these are people that have worked alongside each other for years, often having even crossed paths at the same institutions on the same desks. So much so that they all meet up for an annual Thanksgiving lunch. Sat at their desks late into the evening when everyone else has clocked off these individuals are acutely aware that dotted around the city there is a select few sat in the same boat as them.

“Clients are looking for seamless coverage from pre-European open to after-market hours in the US. Aligning our coverage across time zones means we’re sitting there late at night, this community that sit at their desks at nine or ten o’clock at night. Everyone knows everyone, it’s healthy, it’s competitive,” concludes Green.