Equity Trading 2010—2011:
Outflows, Outrage, and Balance
US equity managers witnessed a challenging market environment in 2010 that once again impacted long term performance and reduced investor confidence. Focused attention on high-frequency trading, market structure challenges, and lower fee investment alternatives all contributed to new concerns. Looking back, it is fair to say the 2010 equity markets will be remembered unfavorably.
Specifically, 2010 will be remembered as the “Year of the Flash Crash”. Data shows the months of May and June were the most active due to higher volatility and increased selling pressures. Preventing another major market disruption is important to restoring confidence, but is not the only action being taken. New investments into front office capability are being made to address markets that are more complex, increasingly fragmented, and much faster.
A number of buy-side firms are spending more time and money on figuring out new ways to remove trading inefficiencies. They are looking for new ways to improve electronic trading capabilities and leveraging existing relationships to increase their opportunity for receiving best execution. Although there are some that feel they have reached a point of automation saturation, the majority of the buy side will be careful about investing any additional money into equity trading desks until conditions improve or volatility picks up again.
Regulations continue to be an important issue for traders. The buy-side trader has not forgotten how Reg NMS, decimalization, Reg ATS, and 28E have forever changed their businesses. This time, they are trying to take a more proactive role in the regulatory debate. However, although the voice of the buy side is becoming louder is not necessarily unified. Data shows that there is disagreement over whether the market structure needs much fixing at all. Key items include addressing high-frequency trading and reducing market fragmentation.
In terms of electronic trading, growth has steadied for the moment. The buy side continues to argue that most broker offerings look the same. This is reflected in the relative stability in the selection of algorithmic providers. Today, the choice of how much business a broker receives goes beyond technology capabilities. Instead, there is an increase value on research, service, and feedback that brokers provide.
Dark pools and alternative trading systems (ATSs) continue to increase market share. As many buy side traders are unaware of how much volume they execute in the dark, they are interested in the differences between pools, such as how pricing models impact their trading behavior and how to execute in larger blocks. When thinking about the reason for why to do business with a particular firm, they are looking for unique flow and specialized services.
So, as equity managers enter 2011, they are looking for better ways to trade. This can mean reducing risks when self-directing flow, or getting more out of the relationship when dealing with sales traders. Brokers will be expected to act as partners and execution consultants as they attempt to increase market share and differentiate their business. Technology firms will be needed to assist in building the right tools to trade with more competition and greater complexity.
Yes, outflows have changed the mindset on the outlook of the business. But if volatility and volumes can pick up again, which we believe they should, the opportunity for the equity markets to thrive again is ripe for opportunity.
US Institutional Equity Trading 2010: Outflows, Outrage and Balance
For this year’s buy-side trading study, TABB Group spoke with 68 head traders of US institutional equity management firms. They manage an aggregate $12.9 trillion in AUM. The discussions covered post May 6 reactions, as well as the views of head traders with regard to current regulatory proposals. Additionally, conversations around technology challenges, commission spending, and changes in buy-side budgets and their impact on changing commission rate structures. They also examine the continued growth of low-touch trading; trends in order allocation across high- and low-touch trading venues; trends and selection criteria in algorithmic trading; and the growing demand for transparency into electronic trading infrastructure and its impact on broker relationships, leading broker algorithm and dark pool providers.