US Equities Market:2013 State of the Industry

Executive Summary         
Each year our US equity clients ask us to provide projections on areas that impact their business, primarily market volumes, commission rates, electronic trading usage, and high frequency trading numbers. People want to know if we are bullish or bearish on the industry. In an effort to distill the factors that we look at when making our projections into an easy-to-read number, we have created an index. The US Equity Brokerage Index has 10 underlying components. We calculate it on a monthly basis.

One of the most interesting trends in the chart below is the unprecedented disparity between the S&P500 and the index. This clearly demonstrates how volumes and market performance do not move in tandem. But, we also believe that the divergence will not last. Either the S&P is bound for a correction or it is time to go long US equity brokerage.  The truth is in the middle. We are modestly bullish on the industry and believe revenues and volumes will up slightly this year.
 
From an investor’s standpoint, it is hard to complain about the performance of the market in 2012. But despite the incredible decline in volatility since September 2011, correlations remain relatively higher, particularly compared to the historical relationship between VIX and ICX prior to 2008. TABB Group believes that until the market exhibits less correlation, we do not expect a tremendous increase in institutional active equity trading activity.

In June 2012, the equity futures market surpassed the cash equity market. We speculated in these pages that if we saw that continue to occur, it would be a bad sign for equities brokerage business, as it is another indicator of passive investing. However, equity futures volume market share has steadily declined since then.

We expect that portfolio managers will take bigger bets on fewer names. Activity around Herbalife and Dell are good examples of the kind of trading opportunities we expect to see this year. Another impact on volumes is the outcome of the continuing investigation of insider trading. If any marquee hedge fund managers were indicted, volumes would suffer. However, we expect there will be some hefty fines levied, but no arrests. News and regulatory battlegrounds will dominate the hedge fund performance and the nature of the hedge fund business.

Investors are still on the sidelines, but client balances at the major discount brokerage firms have been steadily ticking up along with strong market performance. One of our likely scenarios is that investors begin to put money back into the market, quantitative easing itself begins to ease, interest rates move up and stock market correlations unwind. The combination of all of these factors would result in a near-term increase in transactional volumes without the long-term negativity of bear market. Our fingers are crossed along with yours.  

The full report, available to our Equities clients and for purchase here, brings together our most requested data points in one concise report. It includes US equity institutional revenue cut three ways (Total, Execution Only and Low-Touch), market participant volumes, execution venue market share, high frequency trading revenue, mutual fund flows, leveraged US equity volumes and more.