The impact of regulation on liquidity and reduced order flows remain top priorities for over 75 per cent of the European head traders at buy-side firms currently managing an aggregate EUR14trn in assets.
Frugal control of valuable commission dollars will ensure lean and competitive asset managers no longer automatically turn to international bulge-bracket brokers for all investment services, but will increasingly cherry pick their requirements on an ad-hoc basis.
How research and execution services are engaged and purchased will dramatically alter, leading the financial services industry towards a more sustainable, efficient, competitive and profitable future.
In new research, “European Equity Trading 2012/13: Changing the Rules of Engagement,” head traders tell Tabb Group that electronic access remains the mainstay but requires multi-faceted interaction.
“Brokers need to maintain investment in technology or they risk being manoeuvred out of the game,” says Rebecca Healey, a London-based TABB Group Europe senior analyst and author of the study.
A combination of a deepening economic crisis, increasing regulation, collapsing volumes and commission wallets is escalating the need for immediate action on outdated business models. Healey says that “the status quo can no longer be maintained. From investment to execution to settlement, the rules of engagement are changing.”
For its fourth annual buy-side trading study, Tabb interviewed 60 head traders at asset management firms and hedge funds across Europe, the UK and the US between August and October 2012. Discussions included the cumulative impact of declining volumes and commission wallets; adjustments to order allocation; value of the high- and low-touch trading channels; potential changes to broker coverage models; views on today’s market structure; algorithmic providers and product needs; and block trading and risk requirements.
A sampling of the key findings includes:
• The relative value of being a core broker is critical; the number of core brokers is still nine but the commission pool collapsed on average 29 per cent in 2012 with order flow down by 27 per cent
• 62 per cent see electronic execution as now the most important service provided by core brokers
• The divorce from advisory and execution continues; 70 per cent buy research using CSAs, with over 40 per cent now purchasing from independent providers.
Tabb sees 2013 as a watershed year for European equities, says Healey, “turning the corner, breaking free of the shackles of the past to emerge leaner, fitter and ready for the upturn. Recent trading losses have highlighted the need to develop streamlined businesses that reduce costs, control risk and deliver performance over the longer term. Automation no longer equals speed but efficiency, reliability and cost control. As such investment in new technology is set to continue and will be the industry prerequisite, not just for a chosen few but for all. Those who accept this change and their new role within this vastly different new environment will have the greater chance of survival.”