Unbundling and other trends playing out in global equity markets have freed up U.S. buy-side traders to exercise more discretion over their order flow. So even though institutional equity trade commission payments are down almost 50% from their peak in 2009, there is a sizable and growing pool of commissions up for grabs among U.S. equity brokers-potentially as much as $4.4 billion per year.
A new report from Greenwich Associates, Money in Motion: How the Sell Side Can Differentiate and Win Market Share, finds that 59% of institutional commission payments to U.S. equity brokers are not tied to research or advisory services.
Unbundling rules originating in Europe and the corresponding proliferation of commission-sharing agreements have enabled North American asset managers to take more direct control of their execution flow with a focus on best execution, says Richard Johnson, Principal for Greenwich Associates Market Structure and Technology and author of the new report.
Capturing Money in Motion
To have a shot at this business, brokers must first excel at sourcing natural liquidity. This new Greenwich Report provides a detailed analysis of the factors buy-side traders take into account in assessing and comparing a brokers ability to generate natural liquidity.
The next biggest drivers of buy-side trade flows are the overall relationship between a buy-side trader and the institution, and brokers coverage and high-touch service. Together these factors represent almost 60% of the value institutional trading desks derive from their brokers.
Interestingly, buy side traders tell us a brokers brand is a not a big driver, says Richard Johnson. This might dismay the marketing department at bulge-bracket brokers, but should be a sign of encouragement for smaller shops.
Electronic Trading: Growing, and Less Crowded
Brokers looking to win more discretionary trade flows should also focus on e-trading. The average buy-side trading desk tends to have more high-touch counterparts than low-touch, so competing for electronic business may be a less crowded strategy. In addition, e-trading flows are expected to grow from 42% of buy-side trading to 48% over the next three years, representing a 17% growth in low-touch commission wallets.
Ninety-four percent of buy-side traders now use real-time performance and routing analytics tools or expect their brokers to do so, and all brokers serious about competing for execution flow need to move beyond antiquated static reports to ensure they are leveraging comprehensive real-time performance analysis and granular, venue-level metrics.