Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley have maintained their positions as the leading brokers of flow equity derivatives to North American institutional investors.
In Europe, where the flow equity derivatives field is more crowded, Deutsche Bank, Morgan Stanley and JP Morgan have established strong platforms across products.
Winning trading relationships with institutions in options, swaps, futures, ETFs, and other flow equity derivatives is critical to broker-dealer success. Investors use far fewer brokers in these products than in cash equities or fixed income. Institutions typically use only six or seven counterparties for equity derivatives trades and broker-dealer lists in cash markets are generally two to four times longer.
“Brokers that win these coveted relationships consistently combine the best prices with market insights and trading ideas,” says Greenwich Associates consultant Jay Bennett. “Essentially, this is a Bulge Bracket business along with a limited number of other focused but very sophisticated firms competing.”
Users of options products in both North America and Europe cite competitiveness of index-option pricing as the primary factor considered when selecting a broker. Hedge funds also place a high value on brokers’ pricing of single-stock options and willingness to commit capital for trades.
Approximately two-thirds of North American institutions active in equity options and volatility products cite important trading relationships with Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley.
Almost 70 per cent of European institutions active in these products cite important trading relationships with Deutsche Bank, JP Morgan and Morgan Stanley.
As in options and volatility products, investors in North America and Europe cite competitiveness of index swaps pricing as the most important factor considered when selecting a broker.
“Institutions want their brokers to help them use swaps to better manage risk, gain exposures and protect revenue streams and assets,” says Bennett. “In North America, long-only investors pay extra attention to the creditworthiness of their swaps counterparties, while prime brokerage relationships and credit provision more heavily influence broker selection for hedge funds.”
Upwards of two-thirds of North American institutions active in equity swaps name Bank of America Merrill Lynch and Goldman Sachs as an important trading relationship. Morgan Stanley, Credit Suisse and JP Morgan are used by more than 50 per cent of institutions.
Deutsche Bank, Morgan Stanley and JP Morgan each claim important trading relationships with 54-57 per cent of institutions active in equity swaps. Between 44 per cent and 48 per cent of institutions cite important trading relationships with Goldman Sachs, Bank of America Merrill Lynch and Societe Generale.
Even though investors use on average only three or four counterparties for futures trading, relationships are spread out among a relatively large number of competitors in both Europe and North America. Investors select brokers for futures trades largely on the basis of pricing/execution, clearing relationships and electronic capabilities.
Nearly 50 per cent of North American institutions active in equity futures cite Goldman Sachs as an important trading relationship, followed by Bank of America Merrill Lynch and Morgan Stanley at approximately 40 per cent, JP Morgan at 32 per cent and Barclays at 27 per cent.
Between 46 per cent and 48 per cent of European institutions cite important trading relationships with Morgan Stanley and JP Morgan, respectively. Following closely is Goldman Sachs (44 per cent) and Deutsche Bank (43 per cent).
Institutions in North America and Europe look for the best pricing when picking an ETF broker. In addition, offering effective electronic trading platform for ETFs is critical in both North America and Europe as buy-side now reports executing approximately 40-50 per cent of volume via electronic platforms.
With a market penetration score of 60 per cent, Morgan Stanley is the clear leader in the trading of ETFs in North America.
Deutsche Bank is Europe’s top broker of ETFs, claiming important trading relationships with 53 per cent of institutions active in the product.