Buy Side Research Grows

Terry Flanagan

The buy side continues to roll out and invest in their own research and analysis, circumventing the traditional relationship with the sell side.

“It’s no surprise that the buy side is bringing in their own research desks or are frustrated with the sell side,” said Robert McWhirter, chief executive officer of Selective Asset Management at Markets Media’s Canadian Trading and Investing Summit.

Not speaking of any broker in particular, McWhirter, noted that he’s often been left hanging regarding research from a sell side firm. He would come to expect research on a particular field or company, and one day, that would cease. Rather than be contacted by the bank as to what happened, McWhirter reached out to the broker and was notified that the analyst was no longer at the bank, and that the series of research would be left unfinished and incomplete.

“We’ve seen a number of asset management firms grow their own research for that very reason,” said Mark Israel, vice president at Sapient Global Markets during the Canadian Trading and Investing Summit. “The value of external research, be it sell side or third party research is being reduced. Firms that historically didn’t create their own research are now doing it themselves.

Technology and the continuing shift toward low-touch electronic trading has also put pressure on the sell side.

“The thing that secures our relationship is other services,” said James Wanstall, chief executive at BluMont Capital. “Everyone talks about how they have the best execution. I can get a similar price anywhere. It’s, will you work a trade, will you take prop risk if I really need to get out of a position? If you can bring value added excess services that can help increase return, then you can have my business. “I don’t think execution is where the game is headed.”

Less reliance from the buy side on the sell side has left many banks in a difficult position. Combined with declining trading volumes, this has left many broker-dealers consolidating their operations or even shutting down. Since the start of the year, average daily equities volume has been in the 6.9 billion range, down from the 8 billion seen in the same period last year and the 9 billion the year before that. The total number of broker-dealers registered with Finra declined from 4,578 at the end of 2010 to 4,456 at the end of 2011, a drop of nearly 3%. As of the end of March, the number of brokers has declined further to 4,428.

Since the financial crisis hit, banks have been consolidating their operations, whether through the combination of business units or through employee layoffs. Bank of America Merrill Lynch has been among the most visible of these, announcing last year that it would lay off about 10% of its workforce, or about 30,000 employees, over the next two years as it looks to manage costs.

The sell side has been feeling the crunch when it comes time for the broker vote process. Buy-side firms typically utilize research and other services from several brokers. On a quarterly basis, the firm has to decide how much it will compensate each broker it uses for those services, and this is often done through a broker vote. Senior portfolio managers typically have more of a say in the voting process than junior managers. Once the votes are tallied, payment is usually done through a commission management platform. It’s become more important for brokers to battle for those commissions.

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