According to Miranda Mizen, a TABB principal and author of the study, âThe economy aside, the wheels on the European market structure juggernaut are being changed as it motors down the M1 at 70 miles per hour, while the regulators are re-examining the road signs. The arrival of competition in the European equity markets is fragmenting liquidity, and the buy side is contending with a market structure that seems to be working against it.â
In this market environment, she explains, buy-side traders are being buffeted on all sides from the combination of reduced liquidity, increased volatility, a collapse in risk capital and a new market structure. âThe worry lines are much broader and deeper now as the buy side deals with a much tougher trading environment,â she says. As a result, TABB forecasts adoption rates of low-touch channels will reach 91% by 2011, aided by trading systems, broker technology and connectivity. To maximize the potential of their systems, particularly execution and order management systems, FIX connectivity allows them to link to all of their brokers.
âCurrently, nearly 60% of the buy-side trading community is distributing their order flow differently compared with a year ago,â she says, proven by a participant who said, âWe have fewer trades going on, so we have to pay our most valuable brokers instead of spreading it aroundâ However, 84% of those interviewed say they will not increase their broker lists to mitigate counterparty risk,â to which Mizen adds, âDue to the global economic situation, trust, understandably, is in short supply as counterparty risk has become a front-line consideration. Buy side firms have lengthened and deepened the criteria that make up a brokerâs risk profile, and are closely scrutinising balance sheets, technology capabilities and clearing capabilities.â
For 2009, buy-side firms will derive most value from their brokers in the form of execution capabilities, specifically liquidity and technology for low-touch channels, and liquidity and news for high touch. Reliance on sales traders is still declining, she points out, âas the buy side increases its use of direct market access, algorithms and crossing networks in the form of dark, multi-trading facilities (MTFs).â
The scarcity of blocks has led an increasing number of firms to use crossing networks, particularly for sensitive stocks and oversized orders. However, explains Mizen, âMoney is tight and they will hesitate to connect directly if access is possible through a broker. Until winners and losers are more distinct, the buy side is hedging its bets.â
Based on conversations with 53 buy-side traders from asset management firms dealing in European equities in 12 major European Union countries, the 52-page study, which includes 63 exhibits, covers execution methods, counterparties, market structure, block trading and the impact of current trading conditions, as well as the top brokers in and outside of the UK; average number of brokers; major IT initiatives for 2009; the role of smart routing and algorithms; top algorithm providers; best execution measurements; and transaction cost analysis (TCA).