Up, down, turnaround?

For many market participants, 2012 will be remembered as a period of great change, with vast ramifications for how you plied your trade.

What were the highlights and lowlights of 2012 and how did it affect the trading environment? 

Change wasn’t a political slogan in 2012, it was a force to be reckoned with and adapted to. Sell-side consolidation, high frequency trading (HFT) curbs, low volumes and reduced institutional budgets; a lot of factors influenced buy-side trading and execution practices in 2012.

Depending on where and how you trade, some of these factors would have impacted you more than others. In many Asian markets, low liquidity has become the norm. In the US derivatives traders are coming to grips with a dramatically different trading landscape. In Europe the crackdown on HFT has already begun. And all around the globe, buy-side wallets seem to be contracting.

How much has sell-side consolidation impacted the markets? 

The buy-side certainly found broker choice changed this year. The Royal Bank of Scotland (RBS) has disappeared from the equities marketplace, with Malaysian retail giant CIMB buying its Asian businesses and RBS’s historic corporate broking business Hoare Govett was sold to US investment bank Jefferies. Kepler Capital Markets, an independent financial services firm, is buying Credit Agricole’s CA Cheuvreux. The securities division of South Korean electronics giant Samsung dumped its global ambitions in favour of a local focus, and for equities execution the Nomura brand is disappearing from everywhere except Japan in favour of the firm’s agency broker subsidiary, Instinet. Even Dutch group ING got the sell-off bug, dumping its businesses in Korea, Japan and Malaysia.

If you’re not exiting, you’re downsizing.

But perhaps even more important than nameplate changes at brokerage houses was the more pervading move towards merging high and low touch offerings. A number of houses have already started to make such moves, with sales traders and electronic execution services working more closely together, and this is likely a sign of things to come.

What about HFT? How have low-latency players affected the markets this year? 

That depends on how you view HFT – friend or for. In Europe, MiFID II is set to clamp down on HFT with venue-administered order-to-trade ratios, a minimum resting period for all orders and harmonised tick sizes included in the version of the directive unanimously agreed upon by MEPs in October.

That’s good if you’re anti-HFT. But if you’re worried about liquidity in already shallow markets, this will potentially make matters worse.

True enough, but it’s my own dwindling budget that’s preoccupied my time. 

I’m not surprised. ‘Multi-asset’ was the name of the game and the direction many desks were heading in 2012. This has been a growing trend in recent years but it seemed to gather pace in the last 12 months.

Case in point: In the UK, fixed income asset allocation in UK pension portfolios increased to a point where it has overtaken equities. Equity allocation in UK pension funds fell to 38.5% this year, down from 41.1% in 2011, while the proportion of gilts and fixed interest rose to 43.2% from 40.1% in 2011. The figures were revealed in the latest Pensions Universe Risk Profile (The Purple Book), a joint annual publication from the Pension Protection Fund and the UK Pensions Regulator.

Many equities desks are either shrinking or learning how to trade other asset classes. And with more and more OTC derivatives coming on-exchange thanks to new regulations globally, another string will soon need to be fixed to the buy-side bow.

But at the end of the day it’s all about volumes, right? 

Exactly. Trouble in Greece, stalling in Brazil and China, a looming fiscal cliff in the US… Wherever you look (at least in the West) there seems to be economic woes and with them have come historically lower volumes.

For some desks this has played out as a return to traditional sales trading by dealing with people you know as experts in the stocks you’re trying to move. Yet for others, it has meant more reliance on the smarts which come from electronic strategies.

But in this low-volume, low-liquidity environment, it’s harder for algorithm providers to differentiate themselves.

For many traders, the continuing battle in 2012 has been to get business done in size and leave a minimal footprint.