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TABB Group Valerie Bogard

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Buy-side firms prioritise liquidity and relationships in broker selection process

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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 a study by TABB Group.

According to conversations with 100 US head traders for the final instalment of TABB Group’s 12th annual benchmark study, “Broker Relationships in an Era of Full Disclosure: US Institutional Equity Trading 2016,” on why certain brokers were winning their order flow, 65 per cent of the buy-side mentioned liquidity and 48 per cent mentioned the broker relationship, while just 34 per cent 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 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 US equity market structure improvements.
 
TABB’s research reveals that increasingly, both buy- and sell-side firms will be focused on more tangible and measurable services such as algorithms, liquidity, blocks and coverage specifically. 
 
Meanwhile, research and corporate access are becoming less important in evaluating brokerage relationships.
 
Algorithms and coverage were mentioned by 40 per cent 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 per cent in 2015.
 
Sixty per cent of buy-side firms reported coverage changes that impacted which brokers they decided to trade with this year, up from 50 per cent last year. Although firms of all sizes reported an increase in these disruptive coverage changes, mid-sized firms were at the top with 67 per cent 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,” says report author and TABB equities analyst Valerie Bogard (pictured). “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.”

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