Agency brokers look to fresh pastures to fight volume slump

Agency brokerage Bloomberg Tradebook is to offer its buy-side clients a new execution consultancy service, as stagnating equity volumes pile pressure on agency brokers to broaden revenues streams.
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Agency brokerage Bloomberg Tradebook is to offer its buy-side clients a new execution consultancy service, as stagnating equity volumes pile pressure on agency brokers to broaden revenues streams.

The business environment for agency brokers has become increasingly challenging in recent quarters. Equity market volumes recovered after the financial crisis in late 2008 but poor GDP growth in mature economies and more recently, the 6 May 2010 ”flash crash', have damaged investor confidence and therefore trading activity.

According to figures from the Investment Company Institute, US$100 billion has been pulled out of US equities markets over the last two years, with only 20% of the outflows returning to the market. Bloomberg data shows that US equity volumes were down 13% year-on-year at the end of April 2011.

Historically, brokerages owned by investment banks have been better able to ride out periods of low volumes than agency brokerages, due to their more diversified income streams. Agency brokers have long been cognisant of the need to offer a range of services to institutional clients, but in the recent months there has been a concerted push to grow research capabilities as well as other value-added trading services.

“What you are starting to see is agency brokers trying to expand their reach beyond execution services, either with research or execution consulting services, so they are not aligned just to the volume volatility in financial markets,” Raymond Tierney, president of Bloomberg Tradebook, told

Bloomberg Tradebook, which is available to all users of the Bloomberg Professional service, is building a team of execution consultants that will advise clients on how to minimise implicit trading costs.

“We are putting a lot of investment into our execution consulting service, which includes a 14-step accreditation programme for our traders,” said Tierney. “In a fragmented marketplace, it can be challenging for the buy-side to truly understand the tools they are using, the nuances of market structure and the impact of regulation. We want to provide a service that will simplify this for the buy-side and help keep their trading costs down.”

Rob Shapiro, who followed Tierney to Bloomberg Tradebook from Morgan Stanley Investment Management in 2010, will lead the accreditation process. Tierney adds that once the execution consultants team has been fully established at Bloomberg Tradebook, the firm will begin offering the accreditation programme to buy-side trading desks to help them better manage the trading environment independently.

Independent research

Earlier this month, Bloomberg Tradebook also announced new deals with seven independent research providers (IRPs) to give its clients access to new investment ideas. Bloomberg Tradebook now has 15 IRPs on its research platform. Clients of the IRP service can pay using hard dollars, commission sharing arrangements (CSAs) or bundled commissions.

Tierney believes research can also be a key differentiator for agency brokers against firms that have “an inherent channel conflict when selling research that isn't their own”.

Fellow agency broker Instinet, a subsidiary of investment bank Nomura, has also looked to diversify its business away from equity execution. Despite a range of initiatives, the firm reduced headcount in Europe earlier this year and may ultimately be absorbed into its parent company.

In April 2011, Instinet said in a memo that co-CEOs Anthony Abenante and Fumiki Kondo would be appointed as joint heads of Nomura's innovative electronic execution team. Jonathan Kellner, president of Americas at Instinet, says the plans are “part of an evolution” sparked by Nomura's purchase of Lehman Brothers assets at the end of 2008.

“It's been two-and-a-half years since Nomura bought Lehman in Europe and Asia, and the firm is now looking a bit more at how to best leverage all of their assets,” said Kellner. “Maybe it comes into more focus as volumes have contracted, but its mainly looking at how the Nomura group of companies can add the most value to its global client base.”

Instinet, which already counted the Newport broker-neutral execution management system in its product suite, has sought to combat the slump in equity market activity by developing its Meet The Street corporate access programme, expanding its Instinet Access IRP service and offering execution services for options, including algorithms, smart order routing and the CBX Options dark pool.

“The big impetus behind our recent pushes is to ensure we are providing clients with multiple uses for their commission dollars,” added Kellner. “For example, we have always made our technology ”asset agnostic', so that it can be easily developed as market structure evolves in other asset classes.”

As agency brokers look for ways to broaden their offerings there are some trends that could work in their favour.

In a recent report, consultancy TABB Group noted a rise in the use of CSA in both the US (from 40% in 2007 to 72% in 2010) and the UK (from 64% in 2007 to 81% in 2010).

“Following the financial crisis, a number of research analysts opted for the safety of being housed within an investment bank and the ability to leverage their large distribution networks,” said Steve Wood, founder of Global Buy Side Trading Consultants and former global head of trading at Schroder Investment Management. “Now, I think the increasing use of CSAs will lead to a growth in the number of independent research providers, particularly as fund managers look for fresh alpha generation ideas compared to the more generic investment bank research,” said Wood, who holds non-executive directorships at agency brokers ITG and Olivetree Securities.