News review : Equities

Content matters.

Despite the death knell being rung repeatedly for high touch services, the need for content and related services prevails in the US. A series of research reports by consultancy Greenwich Associates shows that electronic trading has stalled while broker dealers are enjoying the first rise in institutional commissions for the first time in five years.

Be25_GreenwichAssc_JBennettThe findings, which were based on 590 interviews with US institutional equity traders and portfolio managers in the first quarter of 2014, showed that for the 12 months ending February 2014, the pool of cash equity commissions jumped 10% to $10.34 bn from $9.30 bn. Investment managers accounted for 55% of total wallet, up from 46% in 2011, with hedge funds accounting for 23% of the commission pool versus 28% in 2011.

Interviewees from hedge funds predicted a 9% hike in the US cash equity commission pool by the end of the year, compared with a 3% expansion expected by long-only firms.

According to Greenwich, the main drivers were investors’ “thirst for content-written research, corporate access, market intelligence” and “analytics providing insight into where their orders are going and where their executions are ultimately coming from”.

Investors were both using high-touch execution services to retain access to research and paying a ‘tack-on’ rate over and above the base execution rate.

This could explain the stagnation in the growth of electronic trading volumes in the US equity market. Single stock electronic trading volumes only rose by one percentage point to 37% in 2014.

The report notes that “a renewed focus by investors on how orders are handled and where they are ultimately executed means that perceived broker quality is nearly as important as the accuracy of the broker’s VWAP algorithm.”

Although the study found that mid-tier brokers are snapping at the heels of their larger brethren and gaining market share, the top nine firms still account for a weighty 64% of both low and high touch commission.

According to the Greenwich Quality Index – the firm’s methodology for compiling survey respondents’ evaluations of brokers’ sales and electronic trading services – Credit Suisse, Goldman Sachs and Morgan Stanley were top ranked for sales trading and trading quality, while Credit Suisse and RBC Capital Markets were rated highest for electronic trading quality.

“While bulge bracket providers have seen their presence in US equity research eroded, they have done a much better job protecting their actual commission share in trading – the engine of revenues and profits in the equities business,” said Jay Bennett, managing director at Greenwich Associates.

© BestExecution 2014

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