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September 1, 2011

Buyside Sees Broker Consolidation

By John D'Antona Jr.

Buyside traders think that the world of execution-only brokerage is ripe for consolidation.

At a recent invitation-only forum sponsored by agency broker Bloomberg Tradebook, 76 percent of buyside traders in attendance said there will be fewer agency brokers in the future. Agency brokers, in the minds of the buyside, must provide other services besides trading in order to differentiate themselves, or otherwise face extinction.

Robert Shapiro

"Panelists said agency brokers cannot just be execution-only, but must provide the buyside with actionable, independent research and trading technology that aids work flow," Rob Shapiro, global head of trading and execution consulting for Bloomberg Tradebook, told Traders Magazine.

The event, "The Future of the Buyside Trader," was held July 21 in New York and attended by 40 buysiders. According to Shapiro, the confab was held so the buyside could exchange ideas on new trends in electronic and automated trading processes.

Buyside panelists said the most important factors in choosing an agency broker are the independent and actionable research they provide and the market color they can add. Any firm that produces unique trade ideas or helps the buyside generate alpha will get their orders, attendees said. The desire for research or ideas even trumps the brokers' ability to provide liquidity.

Dennis Fox, head trader at Birmingham, Mich.-based Munder Capital Management, said research brokers were essential and that he preferred doing business with those who offered commission-sharing arrangements. Overall, for agency brokers to survive in this reduced commission environment, their best and easiest option was to become a CSA broker, he added.

"The future of any agency only broker relies on their ability to aid the buyside in paying for research," Fox said. "Offering research and adding alpha are other ways, but very difficult ways to accomplish that task."

According to Greenwich's 2011 U.S. Equities Investors Study, commissions are tighter these days. U.S. institutions for domestic trades paid $11.55 billion from Q1 2010 to Q1 2011. That's substantially lower than the $13.18 billion reported in the previous survey, done in 2010, and a whopping 17 percent off the 2009 survey's $13.95 billion.

Bloomberg's Shapiro believes the reason for the demand shift to research from liquidity stems from the numerous trading tools the buyside has at its disposal. "They [buysiders] are saying, 'Give me something I don't have enough of. I want work flow solutions or trade ideas'-not more places to trade," he said.

But not all buysiders agreed. For some, brokers that provided the most liquidity were the ones to trade through. "As long as they have good order flow, that is what counts and what will help me," said Cheryl Cargie, senior vice president and head trader at Chicago-based Ariel Capital Investments. "Liquidity is everything to me."

Cargie said her firm has an internal research department that decides how to spend its research dollars, which allows her to focus on trading. "They decide how to spend their money," and that permits her to direct her order flow wherever she can find a contra.

Shapiro said buyside conversations also centered on how broker desks must evolve into specialized and uniquely trained consultants.

"The brokerage business has evolved to a point where trading desks need to be well trained in the realm of electronic trading, the mathematics behind algorithms, market structure and more," Shapiro said, "to provide value back to buyside firms. Traders don't always come trained that way, but they must be in order to survive."

 

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