One thing to watch in the coming year is the evolving relationship of the buyside and sellside. Or maybe we should call it a dissolving relationship. Will 2014 see even less trust and more demands for transparency? Will the sellside scale back its offerings as buyside demands more for less? Late last year, Traders spoke with Rob Hegarty, a former analyst who is now managing director, global head of equities for Thomson Reuters. He shared his thoughts about what the buyside wants, whether equities have grown dull and when we might see some volatility in the markets.
Traders: What will 2014 look like for the buyside? Is it going to be slow and steady growth? Whats the biggest threat to equities for them? Is it another trading outage like what happened to NASDAQ last August?
Rob Hegarty: Thats something theyve always got their eye on. But I think when you talk to the buyside traders, I think the first couple of outages probably did cause everybody to pause a little bit and ask, do we have a market structure issue? Do we have some sort of systemic problems in the market? But I think a lot of those fears were put to rest, number one, in that markets do recover and they make it through those events, even right down to the Flash Crash. That was the first worst of all those. But when you look at whats happened over the years, I think number one that the markets are still where they are despite all of those issues. So people recognize that they can be separated.
The other thing is people just have an understanding that so long as youre protected and you are comfortable in your positions that those market glitches can be overcome. Now, thats not to say we get complacent about them as an industry by any stretch. I think that the buy side is looking for the industry, particularly the infrastructure industry to step in and provide the confidence that the equity markets need in order to operate efficiently and reliably.
Traders: Can you comment on the changing relationship between the sellside and the buyside? Have things profoundly changed?
Hegarty: Yes, I would say its profoundly changed. It depends on the period youre talking about, right? If we go back 15 years, the changes have been incredible, unbelievable. You look at what the sellside provided to the buyside 15 years ago, and it was capital introduction. It was risk capabilities. Its clearly order flows, liquidity. It was research. It was all those of things in the sellside, it was the go-to. In the same way that market venues, trading venues are fragmented, so has the provision of those services that were once provided primarily by the sell side.
But one thing I would say that the sellside is doing is I think theyve adapted nicely to the needs of the buyside, particularly when it comes to the technology you talked about. In any evolving industry or any industry really over a period of years, its almost like water; itll flow to its path of least resistance, right?
Traders: What about the buysides demands for research and greater transparency?
Hegarty: What we see is the buyside has found value in some of the research critiques that came out, so they go to them for research. They go to other venues for certain types of liquidity that the sell side used to provide. When you look at the capital allocation now being done on the sell side, theres so much less capital for them to play with. They cant just step into large positions the way they used to. So the need to find natural liquidity has really escalated over the last five to ten years. When we look at the sell side, its definitely a different game, and I think the buyside has to be more on their game because they have to look at portfolio providers out there, whether its a sellside, a prime broker, technology providers, information providers, whatever it is. Its more incumbent on the buyside today to understand whats available to them and where to go.
Traders: Based on what happened in 2013, whats 2014 going to look like for equities?
Hegarty: First, clearly equities are just coming off one of the most difficult five-year periods theyve had in many, many years and decades even. Actually, 2014 is actually shaping up pretty well from a couple of standpoints. Number one is that we have seen a stabilization in volumes. Its probably too early to say were going to see a rebound, but I do think that were certainly looking at stabilization. From my standpoint, were looking at flat to very slight growth back in equity volumes. Because if you look at 2013 and 2012, it was about the same; pretty stable. I think volumes have stabilized.
I think were going to see a shift, a rotation back into the equities asset class, just given whats happening in the bond markets. I think in terms of tapering, I think no matter how you measure it, tapering of the bond market will mean a shift or rotation back into the equities for an asset class. I think thats a positive. I think the search for liquidity is still paramount in the equities space, and I dont think thats changed much, to be honest. Its probably grown a little more intense over the years.
Traders: Theres absolutely no volatility out there. We see a lot of two percent days here and there, dont we?
Hegarty: Exactly. So volatility has disappeared. I think you can certainly trace some of that to the retrenchment of the high frequency traders. The low volume absolutely brings a little volatility as well. If you go back many years, 20 years and look at the volume versus volatility and everything else. I think what were going to see here is a set up for what I would say is a little bit stronger, more sustained stable growth in equities as opposed to sort of a speculative bubble type growth that weve seen in 2000 to 2008.
Traders: Is equities in danger of becoming a little bit dull?
Hegarty: I wouldnt say that. Dull is not a bad thing if you think compared to what environment people want to be in. I mean, look at where we came from 2008. Then obviously, it bottomed out in March of 09 in terms of value of the indices and just drop in the market.
So I would trade this kind of dull, to be honest with you, with some of the roller coaster rides weve seen in the past. What I would say that were probably going to see is a traders day from 9:30 to 4:00 here in the U.S. is probably not as exciting as it used to be. Probably, but theres upside to that too.
