What’s on the buyside’s plate these days? According to Tabb Group’s annual equity trading report, it’s program trading, high-frequency traders, commission sharing arrangements, capital commitment, real-time transaction cost analysis, hand-crafted execution strategies, and many other tasty topics.
The consultancy released its yearly report titled "U.S. Equity Trading 2010/2011: Outflows, Outrage, and Balance" recently, updating the trends and concerns among traders at asset managers. Written by Tabb analyst Matt Simon, the report covers the year 2010, comparing it with 2009. A smaller commission wallet played a big role in the practices on the buyside last year, but technology, market fragmentation and regulatory events drove trader actions as well.
Tabb interviewed 68 head traders at U.S.-based equity trading desks in September and October of 2010. Their firms ranged from small to large. The smaller shops traded about two million shares per day, while the larger ones pumped out about 22 million. We offer a smorgasbord of Tabb’s observations below.
a. One of the biggest changes in order flow allocation was the increase in program trades from 10 percent to 15 percent. The increase was partly due to the automation of smaller orders by active fund managers.
b. High-frequency trading is the No. 1 market structure concern for the buyside. Traders say HFT is one symptom of an unsatisfactory market structure. The playing field is uneven, some on the buyside complain.
c. Buyside traders are focused on hand-crafting execution strategies and hunting down liquidity.
d. More buyside shops are creating internal IOI (indications of interest) aggregators.
e. The buyside is incorporating real-time trade performance measurement (TCA) into the trading process.
f. Buyside traders are okay with the Securities and Exchange Commission’s dark pool reporting rule, as long as reports are not published in real-time. Traders are also largely opposed to the idea of reporting individual trades. They prefer aggregates.
g. There is a strong correlation between the top algorithms and the largest dark pools. The buyside doesn’t differentiate between the two.
h. All algos are the same, many on the buyside say.
i. There is talk of merging sellside electronic desks with their cash desks. This produced a mixed reaction on the buyside.
j. In 2010, 31 percent of those interviewed said the sellside had stepped up its use of capital to facilitate their trades. That compares to 2009 when only 5 percent said capital commitment would come back.
k. The Volcker Rule may result in brokers reallocating capital to customer facilitation.
l. Commission sharing arrangements are in vogue again. One mid-size firm said: "There is a major push to grow our CSA budget because our commissions are down. CSAs are a hot topic for us."
m. Tabb says that major beneficiaries of the CSA push will be firms’ "core brokers"
n. Buyside firms are reducing the total number of their brokerage relationships. They are using–on average–48 brokers for trading, or five fewer than in 2009.
o. Tabb contends that if the commission wallet continues to shrink, asset managers will continue to reduce the number of their brokers
p. The top 12 brokers get 71 percent of all flow.