THE STATE OF PLAY.
Lynn Strongin Dodds looks at how brokers are adjusting to the post-2008 equities world
Despite the recent stock market rallies, brokerage firms, investment banks and trading venues have been challenged by depressed volumes and revenues over the past five years. The impact has been profound, prompting industry-wide soul searching, consolidation and new look execution desks. Those that haven’t adapted will find it increasingly difficult to survive in the post financial world.
One of the main reasons is that the lower volumes and commissions that have plagued the equity world are a permanent feature for the foreseeable future. For example, the Thomson Reuters Equity Market Share Reporter shows that total EMEA volume slid to €706.6 bn in January 2013 from an impressive €1.4 trillion in January 2008 while research from TABB Group notes that commissions from hedge funds and long-only institutions to European brokers for equity trading dropped 18% to €5.86bn in 2012 from €7.2bn in 2011. In addition, equity commissions paid to US brokers fell 11% to $12.75bn in 2012 from €14.39bn a year earlier.
The situation has only been exacerbated by the relatively expensive post-trade landscape, although changes are afoot with the merger between EuroCCP, the US post-trade services provider of the Depository Trust and Clearing Corporation and EMCF as well as interoperability arrangement struck last year between Europe’s main clearers – EuroCCP, EMCF, LCH.Clearnet and SIX Group.
“Equity trading involves not only the front office but requires interaction with post-trade processes such as clearing,” says Diana Chan, chief executive officer of London-based EuroCCP, who will retain that role at the new firm. “Having one cost base and greater volumes through a single clearer will enable us to benefit from greater economies of scale, and this will allow us to continue to offer competitive clearing fees. However, in order for interoperability to achieve its true potential, all trading venues would need to provide equal access to the four interoperating clearers and open up access to their trade feeds.”
This topic does not fall under the remit of the European Market Infrastructure Regulation (EMIR) although there is scope under MiFID II proposals which advises exchange-owned clearinghouses to be more accommodating. If passed, this would not only have a significant impact on Deutsche Börse, home to Eurex and Clearstream, but it could also possibly threaten US-based IntercontinentalExchange (ICE) and CME Group who are putting down roots in London. Although it is difficult to predict whether these recommendations will make the final cut, there is no doubt that they are one of the most hotly debated topics in Brussels.
In the meantime, market participants are grappling with the current state of play. “It is a difficult time in the equity space,” says Beau Alexander, head of product management for SunGard’s Valdi Solution. “Banks and brokerage firms have a laundry list of things to do. It is not only about complying with the new regulations and the added cost that involves but also continuing to source liquidity at the best price for clients. The big question is how do they achieve this at a time when margins are shrinking? Those that are able to manage their equity trading though can use it as a springboard into other asset classes.”
Not surprisingly, mid-tier brokers are having the most difficulty as they not only lack the resources and economies of scale of their bulge-bracket peers but also the niche expertise of their smaller brethren. As one market participant put it, “There is an argument that can be made that there are two types of firms – the full service British Airways model and the no frills EasyJet. It is the organisations in the middle that are being ultra squeezed.”
However, even the large players have been forced to restructure their equity trading operations to better meet the changing needs of their buyside clients. They are not only demanding the latest cutting edge electronic tools but also help navigating the trickier more illiquid landscape. This has led many to reorganise their equity trading franchises and combine their high and low touch services with an execution consulting offering. “In the past, there used to be a high touch desk for difficult orders with a separate low touch offering,” says Brennan Carley, global head of transactions and platforms at Thomson Reuters. “Brokers have increasingly combined the two but cost pressures are also having an impact on the coverage desks which now have less people.”
Chris Hollands, head of EMEA sales at IT vendor TradingScreen, adds, “The sellside has become more focused on adding value to the buyside by offering increased access to liquidity electronically and new, smarter algos made available through independent platforms that offer multi-asset class trading. However, there are fewer sellside personnel to service the client because of the rationalisation and consolidations that have happened, particularly at the large investment banks, since the financial crisis. There is a much more careful approach to recruitment because the order flow is just not there and they do not want to make any big bets.”
Although the streamlined trading desks have proved popular, the buyside still have a number of concerns, according to a recent survey of 41 US-based asset managers conducted by consultants Woodbine Associates. Number one on the list was a diminished level of service particularly on the high touch end. The ideal brokerage would integrate its services in such a way that it uses a team of experienced specialists that are able to control the conflicts of interest, leakage and anonymity that arise from this approach.
“Different players are taking various routes”, says Chris Jackson, head of execution sales EMEA at Citi. “Across the industry, I’m not sure the merging of these services will benefit the larger clients in the short term as these desks will continue to need specialists in each channel. This may change over time but that change will be very much client driven. Clients have been urging brokers to ‘de-silo’ their execution businesses for years and to look to the broad firm-to-firm relationship across channel. We’ve responded to this view with a more co-ordinated and holistic, instead of product based, approach to providing liquidity and many of the value-added services such as analytics and TCA that clients are looking for. They tell us that access to liquidity should be the same regardless of the channel used. It’s the same with analytics.”
The other significant development is outsourcing. Until now, the focus was on the hiving off of equities trading technology with the biggest banks offering trading tools to mid-tier brokers. For example, last October, Deutsche Bank launched dbIntegrate, a product that offers execution, settlement and custody services to smaller firms. The landscape is shifting with Norwegian broker Christiania striking an agreement with execution specialist Neonet to farm out trade execution – an area previously seen as central to most brokerage businesses. Equally as game changing is if the reported arrangement of Société Générale and Accenture materialises. France’s second biggest listed bank by value is thought to be mulling over outsourcing 400 jobs in its back office operations to the consulting company.
“Historically, it was the mid-tier firms who would significantly outsource their back and middle office operations,” says Julien Kesparian, head of UK sales at BNP Paribas Securities Services. “That is changing and we are now seeing the bigger banks doing so because of the combination of the regulatory impact, shrinking margins and the expense of running a back and middle office.”©BestExecution | 2013