In equities trading there has been a shift in the balance of power to the buy side, according to consultancy Greyspark Partners.
Greyspark said in its “Trends in Equities Trading 2015” report that buy-side clients are now as sophisticated as banks in running automated market-making businesses to meet their own demands. The report added: “As a result, they are demanding a higher level of service from the sell side for the same amount of equities business they have traditionally paid for.”
Russell Dinnage, senior consultant capital markets intelligence at Greyspark Partners, told Markets Media: “There has been a change in buy-side behaviour which is shown by their creation of new trading models.”
Dinnage said the change in behaviour was driven by the increase in assets under management. In addition the largest buyside firms have moved to a more centralised equities trading model in which traders operate from a single, cross-asset trading position from either one central desk in London or New York or on a follow-the-sun basis.
The consultancy highlighted the launch of Luminex Trading & Analytics, a buy-side-only cash equities dark pool, by nine of the world’s largest fund managers at the beginning of this year. Luminex’s trading model is based on the same internalization methods that most large asset managers already use when moving equities liquidity between their internal trading portfolios. “With a low-cost, transparent environment to trade in, Luminex is an end product that is representative of a long-running shift in the balance of power in the equities market away from the sell side,” said the report.
In Europe the Plato Partnership consortium has been formed by asset managers and broker-dealers to create a non-profit trading platform in the region while BlackRock has launched its Aladdin platform for trading assets that includes equities.
As a result of the growing power of the buy side, banks have re-assessed their equities trading franchises and instituted efficiency programs which have resulted in exiting the business completely or consolidating trading systems and services. The report said: “The sell-side equities trading industry is now reaping the benefits of a wide-spread rationalization of its technology stack and the corresponding set of e-commerce business models and client relationship frameworks.”
Dinnage said sell-side firms have also adapted their business models to comply with the incoming MiFID II regulations, effective from January 2017. “We get a tremendous amount of queries about MiFID II compliance and businesses have reinvented themselves to take the regulations into account," he added.
MiFID II aims to separate, or unbundle, payment for research from payment of trading commissions and Dinnage said this will definitely cause changes which may include banks completely outsourcing the research function. The report said: “Banks must focus on providing niche equities research products to a core audience within their client base in markets where they stand to benefit the most from becoming a niche provider of equities liquidity from a regional or sector-based perspective.”
MiFID II’s pre-trade transparency waiver also proposes 4% to 8% volume caps for shares traded on dark pools under the reference price.
Dinnage predicted that MiFID II will encourage the spread of business models like the UK retail service providers, who act as the primary brokers for the bulk of retail equities demand, across Europe or similar firms will be set up on the continent. Other possible models include BTIG, who provide a low-touch-only equities liquidity brokerage model, and Evercore ISI, who provide equities research products.
MiFID II will also increase the focus on transaction cost analysis as sell-side firms will have to prove they are helping their buy-side clients find best execution.
Dinnage said: “In the EU right now TCA is focussed on post-trade reporting. At Greyspark we have argued that post-trade TCA only proves ‘not the worst execution’ and in equities TCA is moving to pre-trade and real-time solutions to allow checks before a trade is executed.”
He added that some firms are using pre-trade TCA in cash equities and equity derivatives as a competitive advantage. “This is in the early stages of development. These firms are looking to extend TCA into foreign exchange and looking at how it can be done in fixed income," said Dinnage.
Feature image via Dollar Photo Club