Increasing pressure on margins at sell-side institutions will see some consolidation and “deeper” partnerships forming over the next few years, according to leading market participants.
Speaking on a keynote discussion panel at TradeTech in Paris, panelists from ITG, Goldman Sachs, SEB and SIX Swiss Exchange agreed that significantly higher costs have crippled margins at sell-side firms.
“The sell-side has huge costs and these are continuing,” said David Shrimpton, managing director of the securities services division at Goldman Sachs. “It costs a lot of money to put the infrastructure in place to route to all systematic internalises (SIs), with data or analytical costs, connectivity, testing, audit trails.”
He added: “For a firm like ours where we have reasonable market share in equities we need to optimise our value chain at every level, but for someone running an equities business with less than 3% market share, we will see deeper partnerships as we look at margin erosion throughout the year.”
ITG’s managing director and head of electronic sales, Duncan Higgins, added that the amount of work needed to be carried out from a connectivity and development standpoint has a major impact on costs at sell-side institutions.
“The flip-side is there are always new entrants in the technology space with new products to make those tasks a little easier,” he countered. “You can have a combination of outsourcing some of those activities or buying and developing internally. I think it’s that which is stopping massive consolidation or the shutting down of broker businesses as quickly as people think it will happen.”
Simon Taylor, head of equities electronic execution at SEB, also explained that the costs of regulation in terms of implementation of the technology are extremely high, but regional institutions are far more challenged in this aspect.
“The barriers to entry from a electronic trading perspective do not cease , and my concern is the drive toward outsourcing which is a given,” said Taylor. “Regional players in particular will face challenges about what they will outsource but that will come down to the core clients. My fear is that despite regional players create a unique value, they will become smaller as that value proposition becomes mixed.”