Head Buy-Side Equity Traders Are Optimistic About Long-Only Rebound

U.S. buy-side equity traders told the Tabb Group that high frequency trading is the most important market structure and regulatory issue today, according to a new benchmark study issued today.

The study, “Institutional Equity Trading : Outflows, Outrage and Balance,” is based on interviews with 68 head traders at US institutional equity firms, managing $12 .9 trillion in assets under management.

In interviews, one out of two institutional equity traders cited the ‘flash crash’ as the most important market structure issues, said the firm today. Buy side traders have continued to struggle with lower commission wallets, unbundling of trade execution from brokers’ research and determining the most optimal broker relationships in 2010. Still, they told Tabb Group that 2010 is forever to be remembered as the “year of the flash crash.” For this reason, long-only trading desks in 2011 are planning to focus more on monitoring orders, implementing tighter controls and evaluating transaction cost analysis, according to a press release summarizing the major findings of the firm’s sixth annual benchmark study.

Despite these challenges, buy-side head traders told Tabb Group they remain optimistic about a rebound in long-only asset management. Moving into 2011, Matt Simon, senior analyst and author of the study, said in the release, that future changes in order flow allocation would be driven by equity strategies and further adoption of electronic trading need.

Tabb group estimates that 30 percent of shares traded by long-only firms are now being done through a broker algorithm, explaining that “performance, brokerage relationships and liquidity access are the leading drivers for deciding which broker algorithms should be used and how commissions would eventually be allocated.”

Shrinkage of commission wallets were also a factor in 2010, with 53 percent of buy-side traders said wallets had decreased at least 20 percent, leading firms to consolidate relationships with the top 12 core brokers who Tabb Group estimates will execute 71 percent of the trading share volume in 2011.

“Reducing the overall number of brokers remains an important way to leverage relationships. Determining who to allocate commissions to in 2011 will continue to be highly dependent on research, electronic trading capabilities and access to liquidity.”

Broker differentiation as one of the study’s central themes, which finds that algorithm providers are hard to differentiate. Fifty-two percent of the buy-side traders said there are no tell-tale differences and competition for quality algorithms is at an all-time high. Simon said in the release that many buy side firms are unbundling research from execution to differentiate how much they pay for each, with commission sharing agreements and a better understanding of the separation leading to lower rates. Brokers can gain market share in 2011 with electronic trading support and feedback as well as hiring well-established sales traders who understand how to service client accounts, predicted Simon.

The 61-page study also covers post-May 6 flash crash reactions, including buy-side views on current SEC regulatory proposals and contain analysis of technology challenges, commission spending and budget trends, the growth of low-touch trading as well as the demand for transparency into electronic trading infrastructure and its impact on broker relationships, leading broker algorithm providers and dark pools.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio