Buy-side firms are under a global microscope to ensure they act in the best interests of their clients, according to TABB Group in the first of a three-part 11th annual benchmark study series.
“US Institutional Equity Trading 2015: A Vision Forward,” covers buy-side firms’ top initiatives, execution channel allocation and commissions, including wallet, rates, CSAs, broker vote and unbundling.
A whirlwind of scrutiny by regulators and media has tipped the scales in favour of long-awaited technology platform implementations to facilitate large tasks of data collection, analysis and surveillance. Where US scrutiny is focused on sell-side routing practices and trading system functionalities, in Europe transparency into buy-side research costs is receiving the most attention but it is increasingly likely that the divorce of research payments from trading commissions in Europe will seep into US buy-side firms’ operations.
Although transparency can set traders free in a world of conflicted interests, more information leads to a greater need to manage it, says Sayena Mostowfi, a TABB principal and head of US equity research who co-wrote the report with research analyst Valerie Bogard based on interviews with heads of trading at 92 buy-side firms, including traditional asset managers and hedge funds.
“Areas for improvement are the subject of debate amongst the buy side, sell side and regulators, including SEC Chair Mary Jo White in her 13 Directives,” says Mostowf. “However, what’s undeniable is the fact that the tides have changed and significant operational changes are in store for the buy side.”
Volume allocated to DMA/algos decreased to 38 per cent from 41 per cent for asset managers and to 43 per cent from 48 per cent for hedge funds in part due to lower commission wallets.
US buy-side firms on average used 68 research firms with small, medium and large firms averaging 46, 63 and 124 firms respectively, magnifying potential impact of European regulation on US buy-side operations.
Surveillance compliance demands (data collection), execution quality (real-time, pre-trade and post-trade TCA) and technological concerns are driving 27 per cent of the firms to replace and upgrade decade-old OMS/EMSs.
In part two, TABB will examine coverage models, valued products and services, including block IOIs, and top broker rankings, with part three covering execution quality and market structure impact issues.
