Compliance with global regulatory regimes and market structure changes is leading traditional asset managers and hedge funds to take a holistic approach to measuring trading and research costs.
Uncovering trends and drivers from interviews with 100 US buy-side head traders, TABB Group has published part one of the 12th annual benchmark study, “US Institutional Equity Trading 2016: Buy Side Emancipation or Purgatory.” The report examines buy-side firm’s top initiatives, commission wallets, execution channels, broker lists and unbundling of trading and research costs.
Report co-authors Sayena Mostowfi (pictured), a TABB principal and head of equities research, and research analyst Valerie Bogard, explain that in conjunction with a shift in regulatory focus from exchanges and broker-dealers to buy-side institutions, a European regulation is set to fundamentally transform buy-side businesses in the U.S. TABB’s study found that due to the global nature of operations, client demand and competitive forces, 66 per cent of buy side firms interviewed for this year’s study will be impacted by MiFID II, up from 38 per cent last year.
The regulatory focus in anticipation of MiFID II has served as a catalyst for further data collection and operational transparency that is forcing buy-side firms to improve their measurement of explicit costs and market impact in order to prove best execution practices. According to TABB, the solution to these challenges in the new global ecosystem is the adoption of new technologies that can support these efforts. In this year’s report, 45 per cent of participants listed technology changes as their top initiative in 2016, with 20 per cent specifying implementing new TCA providers.
“As the buy-side improves measurement processes and explores the ability of new technology to collect, measure and analyse their broker lists, it is likely that existing broker lists will become even more concentrated,” says Mostowfi. “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. As our research finds, one-third of asset managers and nearly one-quarter of hedge funds expect to decrease their broker lists in 2016.”
