GOING IT ALONE? WELL ALMOST.
In the post financial crisis era, the mantra reverberating in sellside hallways is the need to be more client-focused. This of course begs the question as to why customers weren’t always centre stage? The truth is that in the heydays, investment banks were able to pay attention to only to a narrow band of institutions and still generate healthy profits. The picture is different today despite the improvement in the UK and Europe’s economic fortunes. They need a broader base to boost the bottom line but winning the hearts and minds of the larger and even medium sized buyside firms is not that easy as many are taken greater control of their destinies.
This disintermediation is not a completely new theme but one that has gained momentum over the past five years thanks to technological innovation and regulatory reforms. For example, the recent wholesale review by the Financial Conduct Authority (FCA) on the long established practice of using client-dealing commissions to pay for research content is just the latest example of the shake-up in the buy and sellside relationship.
A recent survey conducted by Frost Consulting and software firm Quark estimates that each year around $22 bn is being paid globally for research services, but investment banks’ slice of the pie has shrunk as asset managers turn to independent research providers and consultants, and enter into commission-sharing agreements with banks. At the same time, research budgets at large banks have fallen from $8.2 bn in 2007 to $4.8 bn in 2013. They may have less money available but the demands are greater in that they are expected to produce more than the all-encompassing “waterfront” models and maintenance research. Fund managers also want in-depth analysis and insight on specific sectors, geographies and themes.
Expectations have also been raised on the trading front and a suite of state of the art algo tools is now a given. This is especially relevant today as European buyside firms are increasingly paying for the automated execution of transactions as opposed to human-guided trading. Last year, orders completed by algorithms comprised 51% of payments, up from 46% in 2012, and the amount may rise to 52% this year, according to a recent report from TABB Group. By contrast, traditional human sales traders saw their share of commissions drop to 27% last year from 32% in 2012, with a projected slump to 25% in 2014.
The TABB report points out that it is not just the larger players but also the medium sized firms who are becoming more discerning. If they do not get the service they think they deserve, then they will trade directly themselves via an algorithm. Striking this fine balance between technology and the human touch may be difficult but it is the road that the sellside will have to travel if it wants to stay client focused.
Lynn Strongin Dodds, Editor
[divider_to_top]
