Although the buyside has been known for its cautious and conservative approach to change and adapting to new market conditions, those days may be over. According to a new study by market research firm Tabb Group, the rate of change within the US buy-side equity trading desk is accelerating even though commissions have declined 19 percent since 2010.
In the first of three new reports entitled US Institutional Equity Trading 2014: Bellwethers of the Buy Side, partner and director of research Adam Sussman, senior analyst Sayena Mostowfi, and research analyst Valerie Bogard interviewed 108 asset managers in the U.S. Along with identifying firms that are on the IT leading edge, they found a middle majority of firms who recognize the threats of being behind and are actively engaged in bringing similar capabilities to their firm.
Last year saw the biggest increase in electronic trading, up to 41 percent of shares traded with bellwether firms auto-routing program trades and parent orders with share sizes of less than 5 percent of average daily volume (ADV). But as more of these firms sought to automate pieces of their order flow, the asset managers told TABB a quantitative overlay was critical. This issue came up repeatedly in different forms, from portfolio manager alpha modeling, to venue analysis and internal routing optimization, said Sussman.
Among some of Tabb Groups findings are:
First, trading technology changes are geared towards increasing efficiency, e.g., OMS consolidation, multi-asset class functionality and auto-routing order flow.
Second, analytics are going beyond the conventional execution TCA and incorporating data from the investment process as well as feeding data from the execution analysis back into the investment process.
Third, hiring quantitative personnel that are bringing a sell-side level of sophistication to the trading process. In some firms, these folks are also working closely with PMs and analysts to bring a quantitative lens to fundamental research.
Fourth, engaging the sellside on a detailed discussion on the routing logic for ATSs, and receiving data or summary statistics on a monthly basis. Some, but not all, bellwether accounts, instruct the sell-side where to route.
And finally, among commission sharing agreement (CSA) users, increasing the piece of the commission that goes into the CSA/SD account, while putting some pressure on the execution only rate.
This is the first of three reports based on this research from Tabb Group. The second installment will focus on the future of the US sellside equity business and the strategies that brokers must employ. It is set to be released in April. The third and final report on US trading venues is set for release in May.
To download US Institutional Equity Trading 2014: Bellwethers of the Buy Side, visit the Tabb Group.
