US Institutional Equity Trading 2015: Part 1 A Vision Forward

Market participants are under a global microscope to ensure they are acting in the best interests of their end clients. Perception can easily become reality, and, therefore, process and procedure are essential measures to prevent perceived conflicts of interest. The storm of scrutiny by regulators and the media has tipped the scales for buy-side firms in favor of long-awaited technology platform (OMS/EMSs/back office) implementations in order to facilitate the large tasks of data collection, analysis and surveillance.

Transparency is the focus of regulators around the globe. In the US, sell-side routing practices and trading system functionalities are under scrutiny, whereas in Europe, transparency into buy-side research costs is receiving the most attention. As the decoupling of execution and research payments continues to generate debate in the US and Europe, the tracking and budgeting process has become more important. Third-party providers of broker vote systems and CSA aggregators can facilitate a process for commission allocation and alleviate some of the regulatory pressure by providing greater operational and cost granularity.

Regulatory and competitive pressures also have influenced order allocation by execution channel. For the first time in five years, the percent of volume executed via algorithms has declined – for several reasons, including firms (1) compensating for lower commission wallets with higher-rate execution channels; (2) reviewing/verifying their understanding of electronic tools’ functionality and safeguards; and/or (3) aiming to differentiate their business models (single-stock research from ETFs/passive performance).

Transparency is what sets you free in a world of conflicted interests, but more information also leads to the subsequent need to manage it. Leading buy-side firms that have acquired new technology, built quantitative analytics and added internal market microstructure expertise will invest further in surveillance and compliance tools in order to combat any perceptions of inaction or impropriety. Strategic decisions and agility regarding how best to source research and technology resources globally across multiple regulatory jurisdictions and asset classes will become key to operational efficiency and investment returns.