US Institutional Equity Trading 2014: Bellwethers of the Buy Side
The pace of change within the buy side trading desk is accelerating. Technology, analytics and process are all undergoing changes to adapt to competitive and structural changes. This is an industry known for being more conservative in its embrace of change. Electronic trading may have begun in the late 1990s with some early adopters, but it wasn’t until 2006 that the laggards of the industry finally capitulated, a full seven years later.
Nowadays, the adoption cycle has shortened significantly. Across 108 interviews with US-based asset managers, TABB Group has identified industry leaders who are using new technologies, analytics and trading processes, to give their firms more of an edge. But there is a middle majority of firms who recognize the threats of being behind and are actively engaged in bringing similar capabilities to their firm.
Technology is not only bringing more efficiency through automation but is also seen as a place for cost savings. Firms are looking to consolidate the number of order and trading management systems within their organization, particularly for more standardized and liquid instruments. The leading technology initiatives among asset managers offer a clear view of the various issues the industry is facing and how a cutting edge firm approaches a problem, while a firm with limited means can achieve a close approximation (see Exhibit 1).
Asset managers are also looking for efficiencies within their commission pools, some taking a more aggressive approach to funding Commission Sharing Agreements/Soft dollar wallets. There has been a steady increase in the commission rate associated with funding a CSA, from 1.9¢ in 2012 to 2.3¢ this year. At the same time, the execution component of that commission fell from .9¢ to .8¢. This allows the traders to route more electronically without having to worry about research budgets.
Thus, the use of electronic trading does not have as much of an impact on the total commission pool, since bellwether buy-side firms are more comfortable increasing the research component of a low-touch trade. TABB believes this trend will spread and that the rate differential between high touch and low touch will continue to narrow. As a result, it raises the ceiling on low-touch market share that once existed.
Finally, leading buy-side trading desks are taking a thoughtful and measured approach to where and how their orders are routed to trading venues. While not everyone has the capability to do their own venue analysis, there is a group of analytically-minded buy-side shops who work very closely with a couple of brokers to perform the same analysis once reserved for the largest firms.
US Institutional Equity Trading 2014: Part I – Bellwethers of the Buy Side
For this year’s buy-side trading study, TABB Group spoke with 108 head traders of asset management firms across the US. The interviews were conducted during Q4 2013. We included in our conversations the developing impact of regulation and commission wallets; shifts in order allocation and rates; broker preferences; trading in the dark as well as trading with blocks and algos; and opinions on how today’s market structure is changing.