US Institutional Equity Trading 2016: Part 1 of 3 Buy Side Emancipation or Purgatory

In the years since the financial crisis, financial services firms have continued to be in the spotlight. In US capital markets, waves of regulatory scrutiny have moved from exchanges and broker-dealers to global buy-side operations. In Europe, the revised Markets in Financial Instruments Directive, known as MiFID II, is fundamentally transforming buy-side business operations. Due to the global nature of operations, client demand and competitive forces, this European regulation is expected to impact the US as well.  Approximately 66% of participants believe that even if MiFID II is never implemented in the US, it will impact them, up from 38% last year.

Within this global landscape, the buy side faces heightened scrutiny ranging from fiduciary duties and trading/research cost allocation to investment strategies’ impact on financial stability. The regulatory focus not only serves as a catalyst for further data collection and operational transparency, but also for buy-side firms to measure explicit costs and impact, requiring them to prove best execution. These changes will, in turn, fundamentally shift the concentration of core brokers and services consumed. With approximately one-quarter of the broker list already receiving three-quarters of buy-side commissions, increased focus on core brokers will contribute even further to this trend.

All roads in this new global ecosystem for the buy side lead to technology. Forty-five percent of participants listed technology changes as their top initiative and 20% specified implementing new TCA providers. As data sets and analysis become more complex and time consuming, many leading buy-side firms seek third-party vendors to alleviate some of their operational burdens. Compliance with multiple regulatory regimes globally is not a small feat and has caused many firms to consolidate and harmonize operations across geographies and, for some, asset classes.

Advancements in technology are also penetrating the performance and selection of investment strategies by buy-side firms, sparking interest in creating new funds and competition with existing exchange-traded funds. The mechanics of these technological engagements — whether creating a new fund, determining the value of research and execution services or tracking the consumption for evaluation — are changing the buy side.

For some buy side firms, the breadth of these changes will place them in a suspended state of data purgatory; for others, the adoption of new technology and processes will give them greater freedom and flexibility with the information at their fingertips. Either way, the intense focus and measurement on costs has become the new norm and will drive the success of buy-side firms in the years to come. 

US Institutional Equity Trading 2016

For TABB Group’s 12th annual Institutional Equity Trading (IET) report, we interviewed heads of trading at 100 buy-side firms in the first quarter of 2016. The results will be published in three parts. In Part 1, we review buy-side trends and drivers of top initiatives, commission wallet/rates, execution channels, broker lists, research firms, CSAs and the response to unbundling regulations overseas. 

In Part 2, we will identify trends related to block trading, capital usage and IOI consumption, conditional orders, and trade advertisement. We will also delve into the role of EMS/OMS for buy-side traders including broker product integration, valued functionalities and perspective on vendor fees and improvements.

In Part 3, we will tie together top brokers in terms of commission and in specific categories in the new era of full disclosure. We will discuss execution quality assessment and routing control trends, highlighting what the buy side conveyed as areas for market structure improvements including new trading venues and takeaways from the extreme volatility of Aug. 24, 2015.