Twelve percent of European buy-side traders have shifted equities order flow away from brokers’ sales-traders to more self-directed, low-touch execution methods such as direct market access, algorithms and non-displayed multilateral trading facilities, according to a new study from research and consulting firm TABB Group.
According to the study, ‘European Equity Trading 2009: Counterparties, Capital and Control’, the shift away from sales traders has taken place amid falling liquidity and a dearth of broker risk capital, as well as a rapidly changing market structure in Europe. The study was based on conversations with 53 buy-side traders dealing European equities in 12 major European Union countries.
“The worry lines are much broader and deeper now as the buy-side deals with a much tougher trading environment,” said Miranda Mizen, a principal at TABB and author of the study, in a statement. As a result, the firm forecasts that the adoption rates of low-touch trading channels will reach 91% by 2011, aided by trading systems, broker technology and connectivity.
TABB also found that 64% of European buy-side traders are scrutinising the execution services of their core brokers and that 60% are now distributing their order flow differently compared with a year ago. According to one study participant, lower trading volumes are limiting traders’ choice of brokers. “We have fewer trades going on, so we have to pay our most valuable brokers instead of spreading [order flow] around,” the participant said.
In addition, although the buy-side is now more concerned about counterparty risk, 84% of the traders TABB interviewed said they will not increase their broker lists to manage this. “Buy-side firms have lengthened and deepened the criteria that make up a broker’s risk profile, and are closely scrutinising balance sheets, technology capabilities and clearing capabilities.” said Mizen.
The reduced ability to trade blocks in the current environment is pushing the buy-side traders towards crossing networks, according to TABB. However, Mizen added, “Money is tight and they wil hesitate to connect directly if access is possible through a broker. Until winners and losers are more distinct, the buy-side is hedging its bets.”