Signs of hope and signs of worry. Signs of change and signs of stasis.
While 2013 did not see the roiling turmoil of 2012, with its elections, Occupy Wall Street protests and cascade of bad news, this was far from a boring year. In fact, 2013 was a year of contrasts. For every bit of good news-the Dow rebounded to its highest levels during the late summer and fall, and unemployment numbers continued to inch up-there was also a near-constant stream of worrying reports.
During a steady if muted economic recovery, Republicans in Congress decided to shut down the U.S. government for nearly a week and at a cost of $24 billion. Investment firms saw major profits and boasted record amounts of cash on hand, but still refused to hire back a portion of the workers they laid off in 2008. The Securities and Exchange Commission welcomed a new leader in Mary Jo White, and not only has she proved herself adept at handing out unprecedented fines, she is also forcing the guilty parties to admit their wrongdoing. Look no further than J.P. Morgans jaw-dropping $900 million in fines for the extravagances of a wayward trader known as the London Whale. The Wall Street powerhouse also had to admit that it failed to stop one trader from betting away nearly $5 billion.
Hedge funds continued to see employees and owners charged with insider trading, and many funds closed up due to lack of interest and returns. (This is ruefully amusing when one considers that the Wall Street CEOs said they had to pay their traders their multimillion-dollar bonuses when they accepted the TARP bailouts, or the traders would leave and start their own hedge funds.) The hedge funds are also dealing with a new set of demands: greater transparency in a rule-driven arena.
The buyside saw its power shift in its favor-but at a cost. While they are demanding more from their sellside counterparts, traders are keeping a tighter grip on their commission dollars in exchange for greater transparency and better research and services. With multiple markets, brokers and third-party firms providing the services that once only came from the sellside, the buyside is calling more of the shots these days. In fact, they even have their own dark pool, thanks to the team behind IEX.
Although 2012 introduced us to the term trading glitch with the spectacular meltdown of Knight Capital, those trading glitches quickly lost their exclusivity and became almost commonplace. Disruptive, certainly, but not nearly as unique as they once were. On the plus side, regulators are mulling new rules that will force investment firms and exchanges to test their systems and software. Even the players that drag their feet at every new regulatory proposal realize that their typical protests of vague and costly guidelines may not be heard. The fines are too high these days, as is the reputational risk.
In the coming days, the editors of Traders Magazinetake a look at the 10 trends and stories that shook the trading world. We examine the impact they had on the past 12 months and what role they may play in the coming year. This isnt a trip through memory lane, but more of a look at the road ahead for the men and women on the trading floor. Enjoy.
Number One:
One-Touch Trading Gains Momentum
The institutional equities business is moving to a one-touch coverage model, but the buysides participation is optional.
Thats the message the majority of the bulge bracket brokers are sending out, as they attempt to maintain profitability in the current and extended low-commission, low-volume environment. However, in a concession to the buyside, switching to this single-point-of-contact trading desk is not mandatory and institutional traders can still trade with their favored high- or low-touch trading counterparts.
Brian Fagen, Deutsche Banks head of North American execution services, earlier this year told attendees at a TradeTech conference that this trend was indeed the way trading desks were going, according to conference-goers.
You will see more clients moving toward coverage by fewer people rather than more, Fagen said, but the sellside will not force it on them. That would be a disaster.
Fagens remarks come as the bulge bracket is starting to offer its clients the option of having a single individual or a group of traders covering both their high-touch and low-touch trading needs. Behind the move is the sellsides need to cut costs, although there are advantages to convergence for the buyside, too.
Brokers commissions have fallen from $17.3 billion in 2009 to $12.7 billion in 2012, according to research consultancy Tabb Group. In that environment, something has to give, traders admit. Which means a single trader may start to take responsibility for some or all of a clients automated and manual trading needs.
Five of the nine bulge bracket firms were implementing some variation on the model: Goldman, Morgan Stanley, Merrill Lynch, Citigroup and Deutsche Bank. Two of the firms-Credit Suisse and Barclays-have said they were not. The other two-UBS Securities and J.P. Morgan Securities-would not comment.
Still, the trend is a concern for many on the buyside who prefer to keep their electronic orders separate from their block orders. They fret over a loss of the anonymity they currently enjoy when trading with the bulges electronic departments.
Consolidation is here, said Craig Jensen, a principal and head trader at Armstrong Shaw Associates, a New Canaan, Conn.-based asset manager with $2.5 billion in equities. Its been here, and its ongoing. From when electronic trading first took off, its been a natural progression to where, in the end, theres going to be overlap with cash trading.
Every bulge shop that has spoken with Traders Magazine about the issue has emphasized their single-touch services are optional.
Still, brokers have made the point that it would not be irrational to combine the services of the high-touch sales trader with those of the low-touch electronic sales trader. The cash desk already trades electronically, as well as offering capital and block crossing services.
Matt Samelson, principal at industry consultancy Woodbine Associates, told Traders Magazine that while the topic of one-touch has cooled somewhat from the super-hot topic it was when Traders Magazine wrote about it back in March and April, it is still being discussed and implemented.
Some firms have unilaterally decided to move in this direction-that is, certain firms have decided they are going to steer customers in a way where it is more economically viable to service them, Samelson said. Firms are still trying to get the model right, and this move to a single point of contact is still happening.
