With budgets constrained by declining commissions, many brokers may still be allocating their precious resources to the wrong places, according to a new study by capital markets consultancy GreySpark Partners.
GreySpark Partners gathered responses from 90 different buy- and sell-side firms in Q1 this year as part of its annual survey, ‘Trends in e-Commerce and Electronic Trading 2012’. The research suggests the value proposition offered by brokers needs to evolve significantly, with the current range of market participants unlikely to survive a shrinking “pie” of commission payments from buy-side clients, based on falling equity market volumes in developed markets across the globe.
“When you ask the buy-side, it becomes apparent that the sell-side may have a misplaced sense of where its investments really make a difference to clients,” Frederic Ponzo, managing partner at GreySpark Partners, told theTRADEnews.com. “Trying to differentiate your firm based on the pre-trade services you can offer, for example, would be a poor use of resources. Clients actually care more about what post-trade services a broker can provide – that’s where the money should be spent.”
Ponzo also noted pure execution, while still very important as a sell-side offering, was decreasing in its importance as it became more commoditised. “Having the best platform for execution alone is no longer enough,” he said. Instead, firms will be forced to reconsider their core offerings, either slashing costs dramatically to maintain profitability or scaling up to take market share from competitors.
The research found a shift to a unified, client-centric approach was likely to be popular among all market participants. The research suggested that within three years, 39% of organisations surveyed would be running a centralised e-commerce function, compared to less than 12% today. This would be supported by the deployment of a multi-asset, multi-function e-commerce infrastructure (61% in three years’ time, compared with 28% now).
“Competition is making it harder for the sell-side to differentiate themselves against rivals,” added Ponzo. “This is a zero-sum game, and there will be winners and losers – the pie is simply not large enough to support everyone. Smart investment will make the difference between success and failure.”