The electronic trading revolution that brought the buy-side desk from telephones and working order to algorithms and smart order routing is effectively in place, says Tabb Group in an industry benchmark research study.
However, buy-side assets are down, the commission wallet is smaller and for 2010 the number one goal for the buy side is to rebuild assets and performance.
At the same time brokers are pressed to increase margins but differentiate their mix of services and generate the alpha that head traders need.
US equity managers have watched years of performance-track records go up in smoke and billions in assets fly out the door. More than ever, the buy side needs its US broker partners because it is no longer just about trade execution.
“The name of the game in 2010 is to generate positive relative performance,” says Laurie Berke, principal at Tabb and author of the study.
Portfolio managers are telling Tabb that the way to win that game is to pay the right brokers for the right alpha-generating research, ideas and, equally important, access to the underwriting calendar at investment banks.
“PMs want a seat at the IPO table,” she says, “but a ticket for a seat at that table is not cheap. Traders will use every means at hand to spend what they have wisely by trading with their best-execution providers and splitting the kitty through commission-sharing agreements.”
With fewer dollars to pay sell-side, buy-side desks are formally unbundling. They are adopting execution-plus methodology, separating execution services from content. This trend has been driven by continued growth in use of CSAs, increase in percentage of commission revenue allocated to CSAs and commission split between executing brokers and third-party research.
According to Berke, the trend toward concentration of flow with core brokers will continue with demand for research and reviving the IPO calendar reinforcing that in 2010. Aggressive next-tier brokers who moved quickly were able to increase their market share during the height of the post-Lehman crisis, but the window of opportunity closed by mid-2009.
“Going forward, the bulge brackets will be winners as well as the mid-tier brokers offering both content and superior execution,” says Berke.
The study also reveals that execution-only brokers will grow their market share by servicing mid- and small-sized asset managers under-serviced by the bulge bracket brokers.
In 2010, the relationship between the buy side and the sell side will come under the return-on-relationship microscope. The sell side will be challenged to deliver a high-value blend of research and ideas along with state-of-the-art high- and low-touch execution services, Berke says.
“Brokers will need to deliver those services with pinpoint accuracy to the right clients at the right price. The challenge to the buy side will be to make the right choices optimising the commission spend to obtain the best suite of services across the buy-side organisation by choosing the best match available from a limited number of sell-side brokers. In that regard, yes, the electronic revolution is over and it is indeed back to business as usual.”
