Buy-Side Firms Prioritize Liquidity and Relationships as Top Concerns in Broker Selection Process – TABB Group Study


Tabb Group – NEW YORK & LONDON – The regulatory challenges and cost pressures facing buy-side firms are putting further demands on the sell-side to prove their relationship value. According to conversations with 100 U.S. head traders for the final installment of TABB Group’s 12th annual benchmark study, “Broker Relationships in an Era of Full Disclosure: U.S. Institutional Equity Trading 2016,” on why certain brokers were winning their order flow, 65% of the buy-side mentioned liquidity and 48% mentioned the broker relationship, while just 34% said non-execution services. Compared to 2015 overall, more buy-side firms mentioned liquidity and the relationship and less firms placed importance on non-execution services.

The study includes exclusive buy-side views on top brokers in regards to the following factors: agency block trading, providing capital commitment, driving actionable IOIs, delivering value through execution consulting, investment in trading analytics, developing the strongest research, creating the best coverage models, and providing the best market structure insight. It also reviews the buy-side’s top brokers by commissions and trading algorithms and highlights buy-side preferences for U.S. equity market structure improvements.

TABB’s research reveals that increasingly, both buy- and sell-side firms will be focused on more tangible and measureable services such as algorithms, liquidity, blocks and coverage specifically.  Meanwhile, research and corporate access are becoming less important in evaluating brokerage relationships. Key factors supporting this trend include:

  • Algorithms and coverage were mentioned by 40% of participants as factors driving increased share with brokers.
  • However, half of the participants in the study said the relationship was the top area that brokers needed to improve, up from 44% in 2015.
  • Sixty percent of buy-side firms reported coverage changes that impacted which brokers they decided to trade with this year, up from 50% last year.
  • Although firms of all sizes reported an increase in these disruptive coverage changes, mid-sized firms were at the top with 67% impacted.

“The relationship between buy-side and sell-side firms is at a crossroads as every aspect of the buy-side’s business is under evaluation, from execution quality to coverage,” said report author and TABB equities analyst Valerie Bogard. “Strategic and trusted partnerships will set the leading firms apart from those without access to capital and new, innovative ways to source liquidity. These drivers are causing more relationships to be up for grabs than ever before”

Part one of the 2016 U.S. Institutional Equity Trading Study focused on the unprecedented drive by buy-side firms to implement new technology as they face heightened regulatory scrutiny, while part two reviewed trends related to block trading, capital usage, conditional orders and the role of the EMS and OMS. The 34-page, 28-exhibit part three report is now available for download by TABB’s Research Alliance equities clients at https://research.tabbgroup.com/search/grid.

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