New TABB Research Reveals the Co-dependency of the Buy Side and Sell Side as Both Struggle to Regain Strength in 2010

The electronic trading revolution that brought the buy-side desk from telephones and working order to algorithms and smart order routing is effectively in place, says TABB Group in a new industry benchmark research study published today. But according to a new TABB Group benchmark study, “U.S. Institutional Equity Brokerage 21010: Assets, Commission Management and Concentration,” buy-side assets are down, the commission wallet is smaller and for 2010, the number one goal for the buy side is to rebuild assets and performance – at the same time brokers are pressed to increase margins but differentiate their mix of services and generate the alpha that head traders need.

U.S. equity managers have watched years of performance-track records go up in smoke and billions in assets fly out the door. More than ever, the buy side needs its U.S. broker partners because it’s no longer just about trade execution. “The name of the game in 2010,” writes Laurie Berke, principal at TABB and author of the study, “is to generate positive relative performance,” adding that portfolio managers are telling TABB that the way to win that game is to pay the right brokers for the right alpha-generating research, ideas and, equally important, access to the underwriting calendar at investment banks.

“PMs want a seat at the IPO table,” she says, “but a ticket for a seat at that table is not cheap. Traders will use every means at hand to spend what they have wisely by trading with their best-execution providers and splitting the kitty through commission-sharing agreements (CSAs).”

With fewer dollars to pay sell-side, buy-side desks are formally unbundling. They are adopting execution-plus methodology, separating execution services from content. This trend has been driven by continued growth in use of CSAs, an increase in percentage of commission revenue allocated to CSAs and the commission split between executing brokers and third-party research.

According to Berke, the trend toward concentration of flow with core brokers will continue with demand for research and reviving the IPO calendar reinforcing that in 2010. She explains that aggressive next-tier brokers who moved quickly were able to increase their market share during the height of the post-Lehman crisis but she adds, “The window of opportunity closed by mid-2009. Going forward, the bulge brackets will be winners as well as the mid-tier brokers offering both content and superior execution. The new study also reveals that execution-only brokers will grow their market share by servicing mid- and small-sized asset managers under-serviced by the bulge bracket brokers.

In 2010, the relationship between the buy side and the sell side will come under the return-on-relationship microscope. The sell side will be challenged to deliver a high-value blend of research and ideas along with state-of-the-art high- and low-touch execution services, Berke says. “Brokers will need to deliver those services with pinpoint accuracy to the right clients at the right price. The challenge to the buy side will be to make the right choices optimizing the commission spend to obtain the best suite of services across the buy-side organization by choosing the best match available from a limited number of sell-side brokers. In that regard, yes, the electronic revolution is over and it is indeed back to business as usual.”

For this benchmark study, TABB Group conducted in-depth, one-to-one interviews with 66 head traders at traditional asset management firms, including most of the largest mutual fund and investment advisory firms in the US, managing an aggregate $12.1 trillion in assets under management (AUM).

Discussions covered the devastation of performance and loss of assets on the buy side; the shift in priority from liquidity and execution issues to research, ideas and the investment banking calendar; impact of reduced AUM on the ability to pay the Street for services and the increased focus on commission management on the buy-side trading desk. TABB also examined the continued trend toward concentration of business with a shrinking number of sell-side firms; trends in low- and high-touch commission rates; arrival of formal unbundling of execution and research payments; continued growth in CSAs, execution-plus pricing and commission ratios; key drivers for doing business with core and next-tier brokers; evolving role of the sales trader; the state of block trading and capital facilitation; and allocation of commissions across brokers in 2009.

The 55-page study with 42 exhibits is available now for download by TABB Group Equity Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

Other recent related TABB research includes “Institutional Equity Trading 2009-2010: Dark Pools, Transparency and Consequences”, “U.S. Equity Technology 2010: The Sell-Side Perspective” and “The Buy-Side Perspective on Risk: Frequency, Aggregation and Process.”

About TABB Group

TABB Group is the financial markets industry’s only research and strategic advisory firm focused exclusively on capital markets, with offices in New York and London. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. In January 2010, TABB Group launched TabbFORUM,com, www.tabbforum.com, the online community where capital markets professionals share and contribute commentary on current issues. For more information, visit www.tabbgroup.com.