Readers of theTRADEnews.com have voiced their dissatisfaction with bulge-bracket brokers in the results of our latest monthly poll. Only 7% indicated that they were planning to shift more orders to full-service houses, while the vast majority – 75% – said they would be directing more flow to agency brokers. The remaining 18% plan no change.
Against the backdrop of the global financial crisis, the relationship between global investment management firms and their traditional providers of research, execution and other key services has shifted dramatically. Severe losses from structured credit investments have raised counterparty risk concerns and forced many bulge-bracket brokers to cut costs. As a result, buy-side traders have noted reduced service levels, while appetite and availability of capital commitment – once a mainstay of buy- and sell-side relationships – is all but suspended.
These difficulties are presenting agency shops with the perfect opportunity to steal market share from the large houses. “There has been a very real change in the mindset,” says Bradley Duke, managing director of institutional electronic sales, Europe, at agency broker Knight Equity Markets. “Because the trust in the traditional bulge-bracket firms has been severely shaken and people are re-evaluating those relationships, there is opportunity for execution specialists like ourselves to get a foothold in some of these places.”
Steve Wood, global head of trading at Schroder Investment Management, says the migration of order flow is global. “There has definitely been a shift to smaller brokers in the US, basically because risk capital has become very expensive. The specialist brokers have really focused on client service and granting the buy-side access to pools of liquidity,” he says. “Risk capital is also more expensive in Europe, not only for single stocks but also program trading. Agency brokers are also gaining traction in Asia, despite the fact that it has never been a risk-involved market as far as capital commitment is concerned.”
However, agency brokers are not necessarily always the beneficiaries of the buy-side’s disaffection with larger brokers. “We are doing more DMA and self-directed trading,” says Wood. “We have changed the way we work with brokers because of the contraction in expertise on sell-side sales trading desks.”
Despite the growing popularity of agency brokers’ offerings and buy-side complaints about reduced service, larger firms point put that, even without capital commitment, they still offer services that agency houses cannot.
“We connect to all the venues, have genuinely smart order routers so clients’ orders are routed optimally to the various liquidity pools and we cross a lot of our clients’ flow internally,” says Richard Semark, managing director, client execution at UBS. “It is very hard for agency brokers to compete with these offerings.”
He adds that, in light of the importance of relationships in trading, UBS has “maintained its client-facing headcount as much as possible.”
However, Semark acknowledges that large brokers’ responses to the crisis have not been perfect. “We do take the results of this survey seriously and it is our intention to provide a level of service which is equal to or higher than the agency brokers coupled with what we feel is a superior execution platform,” he says, “There is a role for both big banks and agency players. But obviously surveys like this tell us we have some work to do in servicing our clients appropriately and explaining to them the value proposition we bring.”
Despite the challenges facing bulge-bracket brokers, it may not be the very biggest firms that suffer the most. “There has been a polarisation within the European marketplace,” says Wood at Schroder. “The bulge-bracket brokers are still providing a lot of flow, but now the boutique execution-focused houses are as well. It is the middle-tier brokers who are finding it very difficult. I think that is going to continue.”