Over the past year, while bulge bracket firms struggled to get their respective houses in order, mid-tier trading shops were busy adding new staff, desks and products.
In doing so, firms such as Sanford C. Bernstein, Macquarie Capital USA, Robert W. Baird & Co., Piper Jaffray & Co., Raymond James & Associates, William Blair & Co., Stifel, Nicolaus & Co. and a host of others reoriented their roles in the market.
They aren’t the bulge bracket, with its heavyweight arsenal of capital, products and services. They’re also not the boutiques, with their emphasis on narrowly focused, institution-only specialties. And they’ve moved far outside their original, often regional, coverage areas.
Over the past five years, they’ve extended their execution business across the country, even overseas. They’ve been offering more products and services, including bulking up their electronic execution capabilities. And following the disruptions in the marketplace over the past 18 months, they’ve been signing on experienced pros from the largest investment banks to their trading and research operations, looking to improve their execution quality and expand their coverage.
"My general sense is these firms are not necessarily trying to aggressively build themselves into a bulge bracket firm," said John Feng, a consultant with Greenwich Associates. "Generally speaking, they are trying to make smart hires, beef up selected areas, paying close attention to the profitability of their actions."
Their moves have generally been predicated on client demand, low-cost technology and a surplus of talented ex-bulge-bracket employees looking for work.
But these firms haven’t changed out of caprice. They’ve changed because they had to, if they wanted to increase their chances of getting paid. Industry trends had been moving away from a payment model where midsize brokerages more or less had to be compensated in flow for their research–thanks to growing use of client-commission arrangements.
And they’ve changed because they could. New lines of business became more accessible as more advanced trading technology got cheaper.
For their part, mid-tiers, such as Baird, William Blair, Stifel, Piper and Raymond James, have far outgrown their regional rubric and have garnered reputations as talented national firms that happen to specialize in small- and mid-cap stocks.
They’ve each placed more emphasis on trading products and services. One way to do this was to open offices overseas, as each has. Another way was to build algorithms, as Stifel has and Baird soon will. Another was to add a high-yield bond desk, as Stifel has, or a convertible bond desk, as Stifel and Piper have. Still another way was to start a commission management business, as Piper did.
Macquarie had a different story to tell. The Australian brokerage Macquarie Group launched its U.S. broker-dealer as an agency and research shop in November 2007. Its initial strategy was to gradually roll out more execution and research services as it picked up business.
But revenues exceeded expectations in its first year, as its client list and research coverage grew. Thus, the firm had to adjust its schedule and hire more traders and research staff.
"What started off as a bolt-on business in the U.S.–that was content/research-driven–has now escalated into full service," said Austin Graham, head of U.S. equities trading. "But what we hoped was going to be an agency-only, pay-for-research model has morphed into sectorized trading."
Macquarie’s history of trading in the U.S. goes back about 12 years, when it mostly brokered Australian and Asian stocks for U.S. institutions.
Macquarie Capital USA started committing capital in March. The firm bought financial specialty firm Fox-Pitt Kelton in October, which nearly doubled the number of its U.S. traders. It planned to launch its program trading capabilities in the fourth quarter. And it is also developing execution capabilities in derivatives and convertibles.
At Bernstein, investment research was king for decades. And the trading desk profited from a relationship that directed customer order flow its way as payment for research’s prized services. Roughly five years ago, though, that began to change, as Bernstein ramped up its commitment to trading. This included augmenting its electronic services and adding sector traders.
This past year, Bernstein began committing capital for client facilitation. It also introduced a derivatives group, and started building a desk to trade in Asia.
"We think we’re positioned extremely well," said Tom Wright, Bernstein’s global head of trading. "We feel like this is a very good time for us. Clients are responding very favorably to our trading platform."
Mid-tiers, boutiques and others have acknowledged that the great migration of sales traders from the bulge bracket to independent shops petered out by the end of this year. Several also have said that the trend met with mixed success overall, as the sales traders weren’t always a fit in their new environs. But some mid-tiers have said the outflow generally brought opportunities.
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