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US buy-side equity firms are hiring to achieve sell-side levels of sophistication, says TABB

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Despite a reputation for a conservative approach to change, the development of US buy-side equity trading desks is accelerating at a time when commissions have declined 19 per cent since 2010, according to TABB Group.

In “US Institutional Equity Trading 2014: Bellwethers of the Buy Side,” the first of a three-part annual benchmark research study, Adam Sussman, partner, director of research, Sayena Mostowfi, senior analyst, and Valerie Bogard, research analyst, identify the five most impactful trends among these bellwether firms.
 
The first trend focuses on leading buy-side firms actively seeking to hire quantitative personnel with sell-side levels of sophistication.
 
Last year saw the largest increase in electronic trading – up to 41 per cent of shares traded with bellwether firms auto-routing programme trades and parent orders with share sizes of less than five per cent of average daily volume (ADV). However, as more of these firms sought to automate pieces of their order flow, they realized a quantitative overlay was critical.
 
”This issue came up repeatedly in different forms, from portfolio manager alpha modelling, to venue analysis and internal routing optimization,” Sussman says.  
 
The other four trends identified are:
 
· Trading technology changes geared towards increasing efficiency, e.g., OMS consolidation, multi-asset class functionality and auto-routing order flow.
 
· Analytics moving beyond conventional execution transaction coast analysis (TCA) and incorporating data from the investment process.
 
· Engaging the sell side on a detailed discussion of routing logic for ATSs and receiving data or summary statistics on a monthly basis.
 
· Increasing the part of the commission that goes into the CSA/soft dollar account, applying pressure on the execution-only rate.
 
TABB conducted interviews with 108 heads of US equity trading desks at traditional asset managers with an aggregate of US equity commissions of nearly USD2.5bn in 2013. These 108 interviews were in addition to 75 interviews conducted with US head traders of hedge funds conducted earlier in the year.
 
Part Two will be published in April, focusing on the future of the US sell-side equity business and the strategies that various types of brokers must employ. Part Three, examining the impact on trading venues and trading technology, will be issued before the TabbFORUM “Equity Trading 2014: Efficiency and Disorder” conference in New York on 20 May. 

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