US Institutional Equity Trading 2015: Part 2 Riding the Waves of Collaboration

Over the next year, the buy side faces multiple challenges with data consumption from technology and transparency initiatives, commission management with a decreasing wallet and unbundling obligations, and investment strategy shifts with the growing ETF markets. With the holistic review of market structure underway, leading buy-side firms are pursuing collaboration with sell-side partners, leveraging resources and optimizing new and existing products (i.e., actionable IOIs and conditional orders) and services.

The rapid advancement of electronic trading, coupled with waves of media and regulatory scrutiny, has put data on the forefront of the relationship between the buy and sell sides. More than ever, the buy side is questioning brokers about operations and requesting more granular information, especially around execution and routing. The general mode of operation of the buy-side trader with his or her sell-side counterpart today is trust and verify.

Buy-side traders want greater transparency and a more consultative approach to trading in today’s complex market structure. They want customized coverage depending on their desk structure and liquidity profiles. With commission wallets under pressure, the average number of executing brokers used by the buy side is decreasing. However, a larger portion of commissions is being allocated to buy-side firms’ top 10 brokers. Tailored communication and greater differentiation of service give the buy side more incentive to invest in those broker relationships.

Like everyone else, buy-side traders are afraid of what they don’t know. The greatest way to combat that fear is to share information proactively and openly. Strong relationships will ensure that the data collected is the right information, with the relevant metrics and analysis, and in formats that are readable and accessible. Technology and products will focus on these needs and will drive more seamless collaboration between the buy side and sell side.