NEW YORK & LONDON--(BUSINESS WIRE)--After enduring 2011’s bruising markets, US hedge funds trading equities tell TABB Group that 2012 will be a year of disruption with market conditions, sell-side broker economics and regulation creating a triangle of change, already reshaping their trading environment.
When trading volume drops, says Miranda Mizen, a TABB principal, director of equities research and author of the new annual benchmark study, “US Hedge Fund Equity Trading 2012: Disparate and Desperate,” it causes shifts in trading channels and occasionally strategic direction. This requires a more thorough and constant review of broker lists, a lean on other profit avenues within the firm and a demand for greater control via transparency and information. In 2012, she says, “three major areas already in flux will directly impact the products and services that hedge funds need from their sell-side brokers and the vendor community this year – the cost of doing business, the make-up of liquidity and the reinvention of the brokerage business.”
For this study, TABB spoke with 51 US-based hedge fund companies, including many of the largest hedge funds running US equity strategies, currently managing an aggregate $182 billion in assets, 8% of the US industry total.
Interviews conducted during the first quarter 2012 covered head traders’ views on a wide range of critical topics, including: order-flow allocation across high- and low-touch trading channels; commission rates and commission-wallet trends; broker lists; leading brokers and prime brokers, mid-tier brokers; and coverage differentiation in the high- and low-touch space.
A sampling of key findings includes:
- 50% of hedge funds want greater transparency into algorithmic programming, order placement logic and exposure of order flow in the dark
- Use of direct market access (DMA)/algorithmic trading channels by idea-driven funds jumped by 10% but primarily amongst high-volume funds as others used high-touch channels to pay for services
- Large hedge funds are slashing their broker tails by up to 50% as occasional relationships are under the microscope
- Nearly 90% of the hedge funds interviewed have the same top broker as last year, but relationships and performance are causing jostling amongst the top five brokers
- Nearly two thirds of hedge funds are implementing new processes or systems for compliance reasons
According to Mizen, 2012 will be a defining year for well-performing hedge funds to lengthen the stride of their advance, as those that survived 2011 by the skin of their teeth will seek to improve their performance. Whether they’re expanding into new alpha territory or putting in place processes for new regulatory compliance, their need for products and services is becoming ever more disparate.
“Large funds are getting larger, demanding data, innovation and transparency, while smaller funds can provide valuable sources of order flow – if they can be serviced economically by their brokers, which is not always an easy task,” Mizen says. “Sell-side leadership, with regard to operational transparency, market structure changes, regulatory issues, coverage models and better ways of supporting their needs, will be rewarded with order flow and a place on a shortening broker list. For everyone else, the check will be in the mail.”
The 40-page report with 56 detailed exhibits is available for download by TABB Group Research Alliance Equity 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.
About TABB Group
With offices in New York, London and expanding across the Asia-Pacific region, TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets, based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online global capital markets community covering opinions and analyses on current industry issues, tracked daily by over 12,000 industry professionals.