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December 1, 2010

Broker-to-Broker Business Heats Up

By James Ramage

Some big investment banks and agency brokers are looking beyond their traditional buyside client base and have been ramping up efforts to sell their products and services to other broker-dealers of all sizes.

Charles Susi

The largest firms have spent a bundle to keep their trading technology at the forefront of innovation. What has resulted has been widely described as an arms race of technology and speed to stay ahead of the pack, and these brokers see a niche to market their products to smaller firms that don't have the financial wherewithal or interest to develop their own electronic trading products.

Firms like UBS, Morgan Stanley and Instinet say they have seen growth and increased revenues in the broker business. There is more demand for their algorithms, direct market access, analytics and connectivity to dark pools among broker-dealers of all stripes.

Their broker-dealer clients want to be able to execute in equities, options and futures globally for their institutional clients. But they don't want to build the infrastructure, said Charles Susi, who runs electronic trading in the Americas for UBS.

"There's a real opportunity for us with institutional brokers of all sizes," Susi said. "They don't necessarily have the resources, technology, know-how or quant resources to invest in an algo or DMA platform, or to invest in the low-latency technology they need."

UBS has been dealing with broker-dealers for a couple of years, predominantly the large online retail kind, said Stan Thurley, who heads broker services. And over the last six to 12 months, UBS has expanded into institutional brokerage.

UBS, Instinet and Morgan declined to disclose revenues, but they all anticipate that the business from other broker-dealers will grow and become significant.

One major benefit is that a firm receives additional flow, making it a more important execution venue. "The more flow we have, particularly when it's from a broker working client flow," Susi said, "the more natural flow that we can bring into our liquidity pool to cross with other clients."

At Morgan Stanley, the broker-to-broker business only became a focus in the last few years, said Keith A. Casuccio, an executive director who runs Morgan's product globally. Morgan focused on the segment after a number of broker-dealers contacted the firm for help on the trading technology front.

"We're a client-based business," Casuccio said. "And we have a number of products we thought clients could benefit from."

Instinet has seen increased demand in the last two years from mid-tier broker-dealers, said Bill Cody, who runs Instinet's broker-dealer sales group. Some, such as the larger clients, want to connect to Instinet's dark pool; some, to use its smart routing; others want to execute through its front end, Newport. Some use all of the above or a combination of services.

Instinet set up a broker-dealer sales group to better serve the group, said Jonathan Kellner, Instinet's president.

"I thought it made sense to centralize that," Kellner said.


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