European, Canadian and Asian Traders Begin Move to No- and Low-Touch Channels, Says TABB Group Analysis of Global Equity Trading from the Buy-Side’s Perspective

- Connectivity Critical to Buy-Side Adoption of Advanced Electronic Trading Systems

- Direct Market Access Use to Double by 2008 to 11% of Order Flow

- Order Routing through Electronic Execution Systems to Triple by 2007

NEW YORK, NY, February 22, 2006 – According to TABB Group, with the S&P 500 returning 4.9% in 2005 and hedge funds returning on average 7.6% year-to-date through November, 2005, the FTSE returned 16.7%, the DAX 27.1%, the Bombay Stock Exchange Sensex Index 42.3% and the Korea Composite Index 54.3%, there’s a huge incentive to trade globally that can hardly be ignored by equity traders in Europe, Canada and Asia. But as Robert Iati, a partner at TABB Group, stresses in a new research report, “Global Equity Trading: The Buy-Side Perspective from Connectivity to TCR”, the need to adopt and leverage advanced execution systems for more efficient, accurate routing and trading decisions to minimize their transaction costs is fundamental to driving profitability.

The growing preference among European, Asia and Canadian buy-side traders to direct significantly more order flow to no- and low-touch channels will accelerate global adoption of advanced execution tools, especially in Europe. Noting that the move toward advanced execution will start with the most fundamental tool, TABB Group projects that Direct Market Access (DMA) usage will more than double over the next two years to constitute more than 11% of order flow. “Migration to low-touch channels is in its very early stages,” says Iati. “But there is a big gap between actual electronic order flow and the desire on the part of traders in those regions to see it move more quickly.”

While global capital may be unstoppable and free flowing, the actual mechanics of global investing could not be further from that ideal, explains Iati, who with TABB analyst Wendy Garcia, authored the report. “The world of equity trading is not homogeneous, fully connected or without geopolitical boundaries and heterogeneous and sometimes quixotic regulation. No, investing around the globe isn’t seamless, at least not for the shallow pocketed and certainly not for the faint of heart. But you have to be in it to win it.”

To uncover and analyze the use of and issues surrounding alternative electronic trading strategies, transaction cost research, order management systems and broker relationships, and to examine the impact of these trading methodologies on the marketplace and trading behavior, TABB Group interviewed a geographically diversified sample of 81 head traders at European, Asian and North American, specifically Canadian, buyside firms with assets under management (AUM) equivalent to US$10B to over $50B.

Although he adds that the buy-side is moving to a simpler, more direct trading environment, Larry Tabb, CEO at TABB Group, believes that the path is littered with obstacles that will likely make that transformation more difficult before it gets easier. “Change and transition never are easy. Only inevitable.”

Findings from the 60-page report include:

· Finding liquidity in Europe and Asia is a problem noted by 55% and 60% of traders there, respectively. However, TABB Group believes liquidity in Europe will centralize as MiFID provides a consistent regulatory infrastructure and exchanges consolidate

· Approximately 40% of international buy-side firms use between 16 and 30 broker/dealers.

· 93% of orders continue to flow through either phone or FIX to the sales desk with 7% going to electronic channels of DMA, crossing and algorithms. Of that 7%, these channels were reported as “preferred” by 55% of traders.

· Canadian firms are shifting reliance away from five dominant brokers, moving directly to the market for best execution.

· Opportunities exist for FIX-enabled platforms that aggressively connect to market participants. However, connectivity across Europe lags.

· No single order management system provider dominates.

· 56% of European and 38% of Asian traders cite transaction cost research (TCR) as critical to maintaining or gaining footing in the marketplace.

· With algorithms in a nascent stage, European and Asian firms seek brokers’ guidance.

· CS commands 55% of the market, 70% in Asia alone, sharing Europe with Morgan Stanley and Goldman Sachs. In Canada, Toronto Dominion and Morgan Stanley lead.

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