Broker Relationships in an Era of Full Disclosure: US Institutional Equity Trading 2016, Part 3
Both sell-side and buy-side business models are under pressure, pushing competition to extreme levels. Brokers are under pressure as they fight for the top leaderboard spots on buy-side broker lists while being inundated with regulatory mandates. At the same time, the buy side is under pressure from passive strategies and ETFs and is looking to narrow down broker lists and hone in on building strong partnerships.
In this environment, both buy-side and sell-side firms need to do more with less. For the buy side, the increased competition from passive strategies means they need to have better ideas, gain scale, reduce costs and trade more efficiently in a market that is increasingly orchestrated for smaller and more electronic order flow. For the sell side it’s about economics, as they adapt to constrained budgets, and need to offer different trading services and allocate resources in a more measured manner.
These drivers are causing more relationships to be up for grabs than at any time over the past decade or more. Firms that are winning the buy-side’s hearts and order flow are helping them find and obtain liquidity, which is increasingly automated. To demonstrate performance, brokers are providing greater order routing transparency into strategies and having a better understanding of performance metrics.
Increasingly, both buy- and sell-side firms will be focused on more tangible and measurable services such as algos, liquidity, blocks and coverage compared to softer, less tangible services such as research and corporate access, which will continue to be pressured both by regulators and value quantification challenges.
With these changes, one thing is certain: bringing data to the table is imperative, whether that table is in a conference room with members of the sell side and their buy-side clients or at SEC headquarters with members from across the industry making recommendations that are publicly broadcast. The data-driven review process has reached a tipping point: data is no longer a complement to the review process, it is the basis of the review process.
To succeed in this new era of full disclosure requires strategic and trusted partnerships. The buy side needs their brokers to not only provide them with extensive data about their relationships, they also need them to help to make sense of it. Human judgment and interpretation of such data will be critical going forward. Strategic and trusted partnerships will set leading buy-side firms with access to capital and new, innovative ways to source liquidity apart from the rest of the pack.
US Institutional Equity Trading 2016
TABB Group’s 12th annual US Institutional Equity Trading (IET) report has been published in three parts. In Part 1, we reviewed 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 identified trends related to block trading, capital usage and IOI consumption, conditional orders and trade advertisement. We also delved into the role of EMS/OMS for buy-side traders, including broker product integration, valued functionalities and gave a perspective on vendor fees and improvements.
In Part 3, we tie together top brokers in terms of commission and in specific products and services in a new era of full disclosure. We discuss execution quality assessment and routing control trends, highlighting what the buy side indicated as areas for market structure improvements including new trading venues and takeaways from the extreme volatility of Aug. 24, 2015.