US buy-side firms directed more order flow to sell-side brokers’ sales traders in response to recent equity market volatility, a new Tabb Group report claims.
In a reversal of established industry trends, sales traders have captured 44% of total buy-side flow, according to Tabb’s latest annual survey of US institutional equity trading, compared with 37% in 2007. The research firm said the sustained period of market volatility in recent months had changed the way US equity traders use capital, transact block trades, deploy algorithms and crossing networks and view their relationships with brokers.
Despite the reported rise in use of sales traders, nearly 90% of survey participants “increased or are maintaining” the amount of their order flow executed using algorithms in 2008 over 2007, the survey found. The difficulties of trading large blocks in volatile market conditions were reflected in a year-on-year decline in block executions reported by 51% of 2008 survey participants as well as a fall in the percentage of volume executed on crossing networks for the first time since Tabb began records in 2004.
The report is based on interviews with 61 head traders at traditional long-only institutional asset management firms representing an aggregate $12.9 trillion in assets under management. Interviews were conducted in August and September 2008.
According report author Laurie Berke, the recent trend toward ever-increasing broker consolidation is being reversed as buy-side firms diversify their trading and commission sharing agreement relationships, thereby opening new opportunities for mid-tier and niche brokerage firms. “The next five brokers outside the core group of brokers will grow market share by as much as 20% by 2010,” predicted Berke.
“In some ways, just as the banks will have to go back to taking deposits to loan out money, brokers will have to go back to offering insight, expertise and a partnership to keep the orders flowing in,” added Adam Sussman, director of research at Tabb Group.