NEW YORK & LONDON--(BUSINESS WIRE)--Well-equipped trading rooms on both sides of the Atlantic have been shrinking as highly efficient electronic trading technologies continue to manage ever larger amounts of business, using algorithms, smart-order routers (SROs) and real-time decision-support tools to trade not only equities but futures, options, FX, bonds and swaps.
Long-only asset managers at these buy-side firms tell TABB Group that they’ve been concentrating their trading business and commission-sharing agreements (CSAs) with fewer core brokers. The 80/20 rule is now the 70/30 rule whereby just over 70% of total order flow generated by traditional long-only managers goes to a shrinking list of brokers in the US and Europe.
According to Laurie Berke, a TABB principal and author of the new benchmark research study, “Trading for Alpha 2011: CSA in the US and Europe,” for 2010 and 2011 in the US alone, about half of the buy-side firms are pushing 100% of their CSA commission allocations through fewer than 10 CSA brokers, with an average across all buy-side firms of 9.3 brokers. Across the UK and Europe, the average is slightly higher at 10.2 brokers.
The economic significance of the increased commission concentration is, Berke writes, “the elephant in the corner of the equity trading room.” As such, TABB estimates that the total equity commission pool generated by these long-only asset managers in the US and Europe combined in 2010 shrunk to $13.2 billion, nearly an 18% decline year-over-year in the US and a minus 23.5% CAGR since 2008 in Europe.
Based on this shrinking broker landscape, the power to dictate the terms of the business relationship is now more evenly balanced between broker and client. Although brokers and banks have had highly detailed, cross-product, cross-regional profitability analyses on their customers, it’s the buy side that’s meeting them head-on with similar data. When both sides sit down at the end of the quarter or for a year-end roundup, Berke says, the traders and portfolio managers on the buy side of the table stand their ground, armed equally with hard statistics quantifying the value delivered. Broker votes, analyst votes, performance tracking on recommendations and transaction cost analysis from the trading desk are providing them with the ability to compare Broker A to Broker B on a range of metrics previously unheard-of.
It’s the full-service players who can penetrate the buy-side organization by delivering investment insight and analysis, cross-asset, cross-currency trading and trade processing, Berke says, who will likely gain even greater market share at the expense of the mid-tier player who has only one or two core capabilities.
“In the end, though, that old sell-side question, ‘What have you done for me lately?’ is forever going to be a two-way conversation. Brokers who just can’t compete or merely deliver mediocre services will lose market share rapidly,” says Berke.
TABB spoke with 121 institutional equity management firms for this interview-based study, including 68 head traders in the US and 53 head traders in the UK and Europe, managing an aggregate of USD $12.9 trillion and EU €13.5 trillion. Interviews examined core broker relationships and their market share; the number of CSA brokers for both US and European clients; the drivers for choosing CSA brokers; the percentage of total commissions allocated to CSA accounts; and the breakdown of payment for execution vs. payment for research. The study also scrutinizes the impact of unbundling and CSAs on overall commission wallet and commission rates, highlighted the most frequently mentioned core brokers and CSA brokers in both the US and Europe.
The 28-page study with 26 exhibits is available for download by TABB Group Research Alliance Equities clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.
Recent related TABB Group research also includes: US Institutional Equity Trading 2010-2011: Outflows, Outrage, and Balance; European Equity Trading 2010: Manoeuvring in the Markets; US Institutional Equity Brokerage 2010: Assets, Commission Management and Concentration; US Institutional Equity Brokerage 2010: Assets, Commission Management and Concentration; and European Equity Trading 2009: Counterparties, Capital and Control.
About TABB Group
TABB Group is the strategic advisory and research firm founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, the online community currently with more than 6,500 capital markets members, drawn from buy side and sell side firms, exchanges, regulatory agencies, academia, vendors and media, focusing on thought leadership issues covering current industry-wide topics.