Though competitive pressure and market realities play a role in the service models that firms adopt and employ, trading customers still prefer high touch – for now.
Exchange spoke with Kevin McPartland, Greenwich Associates’ head of Research for Market Structure and Technology, and Phil DeFrancesco, Thomson Reuters head of Cross-Asset Trading Desktop, about the latest trends and how relationships continue to matter.
Exchange: Given that U.S. equity investors execute across as many as 40-50 firms, what does Greenwich Associates’ research show about trends in how investors allocate their business?
Kevin McPartland: Our 2017 research on U.S. equity traders reveals high touch continues to see a greater share of commission rates than other models, although institutions do expect to do more business in the future via lower-cost electronic channels. For the 12 months ended Q1 2017, 52% of U.S. equity trading dollar volume was executed via stock trades with broker sales traders (down from 54% in 2016) while 38% was executed via electronic trades by buy-side institutions.
Exchange: Phil, what insight do you have from our trading customers on what they are looking for from their top relationships?
Phil DeFrancesco: Buy-side traders are still looking for access to liquidity. This fragmented, highly regulated marketplace causes traders fits when looking for a block. Dark pools are not the only answer and having a skilled sales trader help you find liquidity is invaluable.
We also are seeing the continuing trend toward a more well-rounded, cross-asset sales trader. The buy-side is looking for alpha across all asset classes, and the sell-side needs to be able to help with this shift.
Trading trends infographic
Exchange: How important are market-structure-related services to the buy-side?
McPartland: In our 2017 research among 232 institutions, 47% of buy-side trading desk professionals said the importance of brokers providing them market- structure-related services such as content on regulatory issues, trading technology and market data was “important” or “very important.”
Exchange: Your most recent research also shows buy-side traders expect to consolidate their broker lists.
McPartland: We note ever more aggressive competition for trading commissions among the largest brokers. Of the traders we interviewed, 47% expect to cut back the share of commissions they allocate to at least one of their brokers.
Exchange: What characteristics will winning brokers have in this landscape?
DeFrancesco: As I mentioned earlier, having access to liquidity and the ability to effectively trade cross asset will be some of the top characteristics of brokers that will prevail in this shifting landscape. Access to the deal calendar, best performing algos, prime brokerage services and the ability to access non-research-related resources (i.e., company visits, conferences, bus trips, etc.), are other services the buy-side will value.
McPartland: We think there are three key factors:
First, research remains critical. Even in an unbundling world, traders in the U.S. still report that 60% of their commissions are allocated to brokers because of the research, corporate access and sales service they provide. As brokers are deciding which clients to prioritize, the buy-side is doing similar calculus on their brokers.
Second, partnership is key. The buy-side seeks long-term partnerships with their sell-side counterparties, looking for firms that take the time to understand their needs, rather than generic guidance based on the “house view.”
Finally, stability matters. Never before has there been such significant turnover on the sell-side, and clients are feeling the pain. Our research shows that most brokers had 5%-10% of their clients complaining that turnover had disrupted their relationship. With banks continuing to cut senior salespeople and traders, dissatisfaction among the buy-side will likely continue, too.
Taken together, it is clear that brokers providing consistent, high-quality service will stand to win.
Exchange: Firms are already shifting their business models in preparation for MiFID II, and the equities business itself has undergone significant shifts that are likely to continue. What do you think will be the headline trend for trading in the year ahead?
DeFrancesco: Outside of MiFID II, I feel the fragile geopolitical landscape will play a large part in 2018. With the likes of North Korea, Russia, Trump and Brexit all poised to make headlines throughout 2018, any one of those topics could cause major turmoil in the global market landscape. Should be a very interesting year!
McPartland: I think unbundling will certainly have an impact on trading relationships. As execution starts to stand on its own, we will see a shortening of broker lists and increased adoption of Transaction Cost Analysis tools. There will also be changes brought about by new dark pool rules that will impact where certain securities are routed and how those trades get executed.