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April 2, 2012

About Face

ITG Courts the Sellside

By Peter Chapman

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Investment Technology Group, best known for providing the buyside with electronic trading services, has quietly embraced the sellside.

With the drought in orders from money managers now stretching into its fourth year, the agency brokerage is making a big push to win flow from retail and institutional brokers.

The move is a turnabout from just five years ago when, in a public spat, ITG barred competitors from accessing its Posit dark pool. Now it is dangling access to Posit as bait, as part of a new "open door" policy.

Dan Weingarten, ITG

The drive, spearheaded by ITG executives Jamie Selway and Dan Weingarten, has helped the firm keep its head above water while many of its peers flounder.

At the end of last year, 44 percent of the shares traded by ITG came from the sellside. That's up from next to nothing at the end of 2008, ITG officials say. The growth in sellside volume has offset practically all of the decline in the firm's buyside volume.

"The goal is to match the sellside business with the buyside business," Weingarten said. "The overall goal is to grow the buyside business. But as we do that, the revenue associated with the sellside business will grow."

Engaging the Sellside

ITG is by no means abandoning the buyside. In fact, it is angling to become even more valuable to them. Because many money managers are restricting their business to brokers who provide them with a full range of services, ITG is growing a research business.

The firm has bought businesses and hired a number of individuals with research backgrounds, most notably Terry Gardner, the new chief operating officer for the research division. Gardner was previously chief executive of now defunct Soleil Securities.

Still, the firm's quest for sellside flow comes in the midst of a three-year industrywide decline in volume that shows no signs of leveling off. ITG's revenues from commissions and fees declined in 2011 for the third straight year to $446 million.

The drop in commissions, however, has not been accompanied by a drop in volume. In fact, ITG's volume has remained largely unchanged for the past five years, averaging about 200 million shares per day.

The drop in commissions is due to the fact that the sellside pays less per share than the buyside. So despite the stability of ITG's volume, its "revenue capture" rate has shrunk. At the end of 2007, ITG earned about $0.0085 per share. In last year's fourth quarter, it took in not much more than half that.