Low volumes cause buy-side to change tack

Over half of respondents to this month’s poll on theTRADEnews.com have cited the dearth in trading volumes as the chief influence on buy-side execution during 2012.

Over half of respondents to this month’s poll on theTRADEnews.com cited the dearth in trading volumes as the chief influence on buy-side execution throughout 2012.

The December poll asked what the main influence on buy-side trading and execution practices was in 2012, to which 54.4% of respondents chose lower volumes caused by the global economic struggle.

Second, with 22% of votes, was sell-side consolidation, followed by reduced internal budgets (16.2%) and restrictions on high-frequency trading (HFT) (7.3%).

From the buy-side’s perspective, Mark Denny, head of trading at Investec Asset Management, believed the results aptly reflect a year where sluggish trading volumes dominated buy-side decision-making.

“Trading activity is certainly down year-on-year, but I believe we’ve seen the worst of it now and current levels will hold this year, I don’t anticipate a further fall or pick up in volumes,” said Denny.

The drought in trading volumes has made it harder for traders to find matches for their trades and has forced buy-side firms to rethink how they source good quality liquidity.

“Liquidity sourcing has become more challenging and will have an influence trading strategies going forward. Increased use of algos and cash trading desks will also be something we take into account when we distribute our volume to counterparties this year,” he said, adding that he thought buy-side trading desks would increase use of commission sharing agreements in order to trade with fewer counterparties.

Diminishing options

The impact of sell-side consolidation on execution – voted for by just over one-fifth of poll respondents – only affects a specific portion of the buy-side, according to Peter Baillie, senior equities dealer for Martin Currie Investment Management.

“If buy-side desks are noticing a change in how they execute through consolidation it’s probably down to disruption of the teams who know where and how to trade thinner, less liquid and more esoteric names,” Baillie said. “Those affected will likely be investors who are trading smaller cap names or those trading significant, large lumps of companies in one go.”

Brokers have also identified the ability to offer trading in size as a key differentiator for institutional investors that may be seeking to consolidate flow with fewer sell-side partners.

“A low volume environment changes how market participants pay for research and execution and the buy-side will increasingly look for partners that offer the most valuable service,” said Duncan Higgins, head of electronic sales for agency broker ITG.

New year, new regulation

Regulatory change was a major source of concern for market participants this year, and is set to have an even greater influence of trading practices this year, according to Higgins.

With elements of the European market infrastructure regulation (EMIR) scheduled to come into force this year, and a final text of MiFID II expected by the year’s end, concern has increased on what exactly these changes will mean for the market.

EMIR will mandate the clearing of all OTC derivatives through central counterparties, which will require the buy-side to hold larger amounts of collateral against a trade, while MiFID II could limits trading venue options for the buy-side through restrictions that are likely to be imposed on broker’s internal dark pools.

Higgins also attributed the 7.35% of respondents who cited increased HFT restrictions as linked to a better understanding of trading practice among market participants.

“There’s less concern over the presence of HFT traders in the market and they’re seen as a source of liquidity people can turn to when they need to complete a trade,” he said.

HFT has been restricted through a transaction tax in France and a new law in Germany in 2012 and will also be addressed in MiFID II with exchange-set order to trade ratios and a ban on maker-taker pricing models.