TABB Group has announced the findings of its fourth annual industry benchmark study, ‘Institutional Equity Trading in America: Divining a Path to Liquidity’.
According to its co-authors, senior consultant Laurie Berke and research analyst Matt Simon, as the paradigm shift in electronic trading that began nearly 10 years ago plays out, the landscape continues to shift. "Buy-side traders have as much technology and expertise to effectively trade in today's trading environment as their sell-side counterparts, but both sides face a rapidly shifting path to finding liquidity," they comment.
The report finds that although regulatory changes have facilitated the development of new execution venues – electronic communication networks (ECNs), multilateral trading facilities (MTFs), crossing networks and dark pools – that have resulted in an increase in the technology that now dominates the buy-side trading desk, completion of trades is not an easy task.
Based on analysis of 65 interview-based discussions, TABB Group finds that recent volatility, the increasing demand for immediate results and the overwhelming cost of building infrastructure continues to pose significant challenges to buy-side firms.
The need to seamlessly and quickly trade in all venues, geographies and asset classes results in an ongoing, increasing reliance on the sell side, says the report.
The decline in commission rates and growing adoption of commission sharing agreements (CSAs) to consolidate commission dollars results in a drive back into the arms of the bulge-bracket brokers. Although pressure on commission rates will not cease, TABB Group predicts this shift from low- to high-touch flow will inevitably drive blended commissions rates up until volatility declines and the markets stabilise.
The consolidation of flow to bulge bracket sell-side firms is forcing brokers to determine how to attract the largest amount of liquidity at the most economic prices, leverage technology investments, provide competitive decision-making services and maintain their core buy-side relationships. To accomplish this, TABB Group finds that brokers are increasing their service levels to their best clients and developing value-added execution technologies.