03 February 2010 News

 

Tabb: Buy side and sell side in US struggle to regain strength

According to Tabb's new study, "US Institutional Equity Brokerage 21010: Assets, Commission Management and Concentration," buy-side assets are down, the commission wallet is smaller and for 2010, the number one goal for the buy side is to rebuild assets and performance - at the same time brokers are pressed to increase margins but differentiate their mix of services and generate the alpha that head traders need.

With electronic trading firmly established, "The name of the game in 2010," writes Laurie Berke, principal at Tabb and author of the study, "is to generate positive relative performance," adding that portfolio managers are telling Tabb that the way to win that game is to pay the right brokers for the right alpha-generating research, ideas and, equally important, access to the underwriting calendar at investment banks. 

"PMs want a seat at the IPO table," she says, "but a ticket for a seat at that table is not cheap. Traders will use every means at hand to spend what they have wisely by trading with their best-execution providers and splitting the kitty through commission-sharing agreements."

With fewer dollars to pay sell-side, buy-side desks are formally unbundling. They are adopting execution-plus methodology, separating execution services from content. This trend has been driven by continued growth in use of CSAs, increase in percentage of commission revenue allocated to CSAs and commission split between executing brokers and third-party research.

According to Berke, the trend toward concentration of flow with core brokers will continue with demand for research and reviving the IPO calendar reinforcing that in 2010.  She explains that aggressive next-tier brokers who moved quickly were able to increase their market share during the height of the post-Lehman crisis but she adds, "The window of opportunity closed by mid-2009. Going forward, the bulge brackets will be winners as well as the mid-tier brokers offering both content and superior execution.  The new study also reveals that execution-only brokers will grow their market share by servicing mid- and small-sized asset managers under-serviced by the bulge bracket brokers.

In 2010, the relationship between the buy side and the sell side will come under the return-on-relationship microscope.  The sell side will be challenged to deliver a high-value blend of research and ideas along with state-of-the-art high- and low-touch execution services, Berke says. "Brokers will need to deliver those services with pinpoint accuracy to the right clients at the right price.  The challenge to the buy side will be to make the right choices optimizing the commission spend to obtain the best suite of services across the buy-side organization by choosing the best match available from a limited number of sell-side brokers.  In that regard, yes, the electronic revolution is over and it is indeed back to business as usual." 

For this benchmark study, Tabb Group conducted in-depth, one-to-one interviews with 66 head traders at traditional asset management firms, including most of the largest mutual fund and investment advisory firms in the US, managing an aggregate $12.1 trillion in assets under management.