Sell-side consolidation in 2012 left the buy-side with less choice but fewer suppliers to keep happy. Is this cyclical change or is something more fundamental going on?
Signs show these cuts are deep and very possibly permanent. Equities – from origination to research to trading – has long been considered a staple sell-side offering; see how Barclays and Nomura rushed to complete their product portfolios after Lehman Brothers’ demise. But now, even the brokers that haven’t exited equities have sought to reposition it in light of drastically reduced volumes and a market structure that seems to get more complex and expensive by the day.
“Equity markets are being dramatically reshaped globally as a result of the current environment,” said Benoit Savoret, joint head of global equities at Nomura, as the Japanese bank confirmed the consolidation of its cash equities businesses in its agency brokerage subsidiary, Instinet.
Elsewhere, CA Cheuvreux is being bought by Kepler Capital Markets with the aim of creating a continental European research powerhouse, while RBS’s Asian cash equities business was bought by Malaysian bank CIMB to capitalise on emerging opportunities in the ASEAN region.
But while some equities sales and trading businesses are being made to fit into a broader business plan, those sheltering in larger institutions are being reorganised to make better use of remaining resources, notably with sales, electronic and program trading staff working more closely together to add new value to a global customer base.
Is that the choice: scale or specialisation to survive?
While merging of execution services teams to serve more clients with fewer staff is now commonplace across the street, but some larger brokers are also combining related services with the aim of offering a compelling service beyond the buy-side. For some time, it has been apparent that mid-tier and smaller brokers are struggling to offer the regional or global execution services that their larger institutional clients now expect.
The latest dip in volumes has just accelerated the inevitable: increasingly robust commission-sharing practices are making it easier for boutiques to focus on content while outsourcing execution and clearing. Citi, BNP Paribas, Deutsche and Instinet have all been ramping up their execution-to-clearing offerings to smaller sell-side firms but it’s likely that all major brokers are targeting this market.
Some recent research suggests specialisation may not be the best way forward.
A September study from Greenwich Associates found that across Europe, global banks with investment and research services grew their share of the commission pot from 66% to 70% in 2011. In the UK specifically, it grew from 63% to 68% in the same period. The gains came at the expense of sell-side firms that specialise in specific countries, sectors or small- and mid-cap stocks.
How is the buy-side responding?
Similar to their sell-side counterparts, the buy-side is under cost pressure and has to manage resources to deal with what is now considered by many to be the ‘new normal’. Low liquidity and lacklustre equity performance has seen commissions tumble, which means the fees paid to brokers are spread ever thinner.
Investment managers will always need niche providers to seek out those less-liquid stocks that are hard to come by and anecdotal evidence suggests traders may need to have a little more faith in full-service brokers to ensure they access liquidity.
The combination of high- and low-touch services at bulge-bracket firms means the buy-side may be suspicious that sales traders get a look of DMA and algo flow before it hits the market.
But the difficulties investment managers have experienced in locating liquidity means they may need to put their suspicions to one side.
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