The round of failures, heavy losses, bail-outs and mergers suffered by investment banks in 2008 has given smaller rivals a window of opportunity to woo clients, according to Tony Nash, principal of boutique UK brokerage Execution.
“The big global brokers may go through a period of consolidation and restructuring, which ultimately could take between 18 months and two years to fully take effect,” says Nash, who joined Execution in November and was formerly head of portfolio and electronic trading sales, Europe, Lehman Brothers. “They are not going away – they will come out of that process lean, extremely hungry and in good shape. However, that presents a window of opportunity for agency brokers and boutiques to establish themselves firmly with their client base with specialised products and services.”
Execution plans to cement relationships with the buy-side in part by helping them navigate through the trading conditions that have prevailed since investment bank Lehman Brothers collapsed in September. In Europe, buy-side traders have had to cope with severe market turmoil while coming to terms with the myriad structural changes wrought by MiFID. Traders now have to hunt for a dwindling amount of liquidity on a growing number of trading platforms, at a time when volatility is making any delays or mistakes costly.
“I can’t think of a time when the challenges have been as great for centralised dealers,” says Nash. “Both agency houses and global investment banks must keep focused and help when clients need them most, which is going to be in the first six months of next year.”
Nash thinks a combination of new and old trading techniques need to be employed to weather the storm. “This environment favours a model where a broker has the ability to unlock the latent liquidity in these stocks through traditional broking,” says Nash. “This, combined with a sophisticated smart order routing process, is going to become increasingly important in an environment where the marketplace now is more opaque than it ever has been.”
Smart order routing will play a particularly important role in the buy-side’s hunt for liquidity in 2009. “The smart order routing technology employed by executing brokers has probably become more important now than the construction of execution algorithms,” says Nash. “How a router sweeps venues, the order in which it sweeps, the decision process of placing passive orders and the latency are all extremely important factors that can have a significant effect on the performance of any algorithm.”
With more smart order routers being launched by brokers and vendors, the coming months could help sort the wheat from the chaff. “As time goes on, it will be become increasingly transparent when trying to differentiate between the quality of the smart order routers; seeing which ones do a good job, and which ones are merely complying with very basic standards,” says Nash.