You’ve got to hand it to Michael Lewis. A year after the movie version of his book “Moneyball” hit theaters to critical acclaim, the former Salomon Brothers broker and “Liar’s Poker” author scored another home run with “Flash Boys.” His expose of high-frequency trading, its impact on the market and how a new buyside dark pool, IEX, was going to level the high-speed trading field struck a chord with traders, to say the least. In fact, if he would have walked onto the podium at a conference of traders earlier this spring where his book was lambasted by the panel and the crowd, New York’s Finest would have needed riot gear to save the hated muckraker.
Though some critics have subsequently downplayed the impact of his book and questioned his allegations, they must admit that this 288-page tome inspired the debate of the year. Think about this: Name another book about financial practices that spurred outraged headlines, heated exchanges on cable news programs, congressional hearings and a call for new rules. We’ll wait.
While a book set off the firestorm of the year, several other events also rocked the trading floor. Exchanges and trading floors saw a return of initial public offerings with scores of companies going public, led by the showstopper IPO of Alibaba of China. Dark pools continued to fascinate with the details around their volumes – they were designed for large-block trades years ago, but today traders are using them for small orders that once went to open, lit exchanges like NYSE and Nasdaq. As these traditional exchanges continue to fight back against their diminishing market share, law enforcement officials are launching probes into these dark pools to look for predators. In an age of transparency, the dark pool days may be lighting up.
Traders continued to pine for volatility ever since the markets calmed down in late 2012 during the Euro crisis, when the notion of Greece and other credit-strapped nations leaving the EU currency roiled the markets. Since then, the stock markets across the globe have been relatively stable, with indices in the U.S. climbing to new heights. Thanks to Vladimir Putin, Ebola and soft European job numbers, however, the markets saw the sharpest swings in years during the summer months before returning to solid, stable numbers in the fall.
In the next few pages, the editors of Traders look at the news stories and trends that had the biggest impact on the lives of traders and brokers. Whether it was the threat of new regulations, rising commissions, the challenges of trading a once-shady digital currency or the changing role of algorithms, these issues kept traders awake at night and staring at their wall of flat-panel monitors during the day.
All in all, 2014 was a year of high fines, record returns on indexes and lower trading volumes. It was a subtle year, but it certainly wasn’t a boring one. We examine the impact the top trends had on the past 12 months, and what role they may play in the coming year. A different one will appear each day.
Commissions Rebound After Four-Year Slump
By John D’Antona Jr.
The U.S. equity market has finally come to the light at the end of the commissions tunnel ? growth in broker-dealer fees during the last year.
U.S. equity commissions are forecast to climb 10 percent to $10.3 billion in 2014, the first growth seen in five years. The final data will be made public next spring, but overall things are looking up given the preliminary data.
For the 12 months ending February 2014, the pool of U.S. cash equity commissions increased 10 percent to $10.34 billion from $9.30 billion, according to Greenwich Associates, an equity market consultancy. All-in commission rates also grew slightly for the first time in five years, ticking up just over 2 percent from 2013 levels.
This increase, Greenwich said, was driven largely by investors’ thirst for content-written research, corporate access, market color and analytics to provide insight into where their orders are going and where their executions are ultimately coming from. In fact, 80 percent of the commission wallet increase came from spending on research and other related services. Research still drives the bus.
The Greenwich findings are from several recent studies, based on 590 interviews with U.S. institutional equity traders and portfolio managers in the first quarter of 2014. The interviews also found that mid-tier brokers have gained share on the bulge bracket, providing both sector-specific trading and research services to institutional clients.
But when assessing combined high-touch and low-touch commission flows, the top nine firms still control an aggregate 64 percent share of commission.
“While bulge bracket providers have seen their presence in U.S. equity research eroded, they have done a much better job protecting their actual commission share in trading ? the engine of revenues and profits in the equities business,” said Jay Bennett, managing director at Greenwich Associates.
However, the growth in commissions is tempered by the fact that the consultancy found there has been little to no growth in electronic trading.
The sellside competitive landscape also showed signs of its continued evolution, Greenwich reported. While the top tier still sees the majority of the flow, Greenwich Associates data shows a strong trend towards mid-tier brokers for both execution and research. In 2007, the bulge bracket had a 78 percent share of trading and 71 percent share of research. Now in 2014, the bulge bracket has only 64 percent of trading and 53 percent of research, with mid-size/regional brokers and sector specialists benefiting.
The importance of mid-tier brokers is the most noticeable in research, as they now account for 40 percent of the research wallet. When asked which firms are most important for small/mid-cap research and advisory, of the top 10 firms cited by investors, seven fall into the mid-tier bucket.
Said Kevin McPartland, Greenwich Associates’ head of market structure and technology research, “Investors don’t want a jack-of-all-trades, they want a master of one.”
