Specialisation, not consolidation, is the more likely outcome of the evolutions currently taking place among both buy- and sell-side firms, attendees of TradeTech were told this morning.
With the investment industry facing changes not just from unbundling but other regulatory initiatives and technological innovation, many have expected the market to consolidate on both sides of the Street.
“For a long time there has been overcapacity on the sell-side,” said Christoph Mast, global head of trading at Allianz Global Investors. “We always expected the sell-side would consolidate but over the past 10 years it hasn’t happened and we’ve hardly reduced our broker lists.”
The expectation of panellists at TradeTech was that, while scale can be important, the need for specialist support and advice would be a bigger driver of change than consolidation.
Simon Steward, head of European trading at Capital Group, explained, “Today we’re seeing greater use of independent research brokers and there is a place for brokers offering the broad range of services we see from the bulge bracket and the in-depth specialist knowledge of the small boutiques.”
“Mid-tier brokers face problems in this area perhaps, but there are a lot of stocks out there that need covering so there are opportunities to specialise, be it in small or mid-caps or in some other way.”
But if consolidation is unlikely and specialists are set to be valued, does this leave opportunities for new entrants to the market?
No, according to Exane BNP Paribas’ Antoine Bisson, head of execution, who added: “The barriers to entry are increasing, both in a regulatory and technological sense so I don’t think we’ll see many new entrants. There might be some demand for independent research, but overall clients have shown a preference for a full service model.”
The buy-side is also facing challenges which could lead to changes in its business model. While the largest asset managers have continued to grow, small firms have also done well, but again it is those in the middle that need to examine how to get the best value for their clients.
One way this could be achieved is via outsourcing. As Mast said: “firms need to decide if they still want to have their own trading desk.”
Steward agrees that it is something all buy-siders should be looking at. “It comes down to cost management and for some the best solution to managing their costs will be to outsource the trading function.
“The issue of sell-side outsourcing of trading desks, so they can focus on research or other aspects of their business, has also been raised, but it’s very dangerous for them as admitting you can’t execute for yourself creates a very negative perception.