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TABB Says Brokers Face New Competitive Pressures from Buy-Side Firms Driving Change across US Equity Markets

New research from TABB Group says there is an air of cautious optimism as market conditions improve, commission wallets nudge higher, assets return and volumes stabilize. However, broker lists remain under pressure and the hunt for blocks of natural liquidity remains difficult.

According to TABB CEO and founder Larry Tabb, who wrote part two of the firm’s annual US institutional equity trading benchmark study, despite recent gloomy news, the immediate outlook for the broker community is more bullish than in recent years. “The TABB Equity Broker Index, monitoring whether we’re bullish or bearish on the US equity brokerage industry, looks strong, buoyed by rising assets under management and solid stock market performance. Still, that optimism is striped with caution.”

For the new study, “US Institutional Equity Trading 2014: Part 2 – Undercurrents of Change,” TABB Group spoke with 108 heads of trading at asset management firms across the US during Q4 2013. Interviews covered commission wallet; shifts in order allocation and rates; broker preferences; trading in the dark as well as trading with blocks and algorithms; and views on current market structure. It also explores the impact of buy-side initiatives, decisions and behavior on brokers, views on performance and coverage, and their outlook for 2014. Part one, “US Institutional Equity Trading 2014: Bellwethers of the Buy Side,” published earlier this year, focused on buy-side drivers and emerging trends amongst bellwether firms.

This year, says Tabb, participants nominated brokers that stand out as “best-in-class” across eight categories - market color, flow, risk, agency trading, algorithmic broker, execution consulting, analytics and market structure - independent from any commission or amount of order flow directed to that broker. “We wanted to compare perception of excellence with actual distribution of commission wallet, exploring the extent to which these services bring in incremental revenue, are prerequisite table stakes or shape the brokers’ products.”

According to Tabb, key points from the study include:

  • More than half of commissions go to the top 10 brokers.
  • An aggressive approach to funding commission-sharing agreement (CSA) / soft-dollar wallets has caused a steady increase in the commission rate associated with funding a CSA.
  • 80% of buy-side firms are positive or neutral about new broker coverage models.
  • Over 70% say that how they are covered impacts how they trade and brokers used.
  • Coverage models remain grounded in trust: nearly 60% say a sales trader should never see low-touch flow, that anonymity and control associated with trading algorithmically should remain sacrosanct.
  • 33% of the buy side has an initiative around data, including improving transaction-cost analysis (TCA) capabilities, harnessing internal data, understanding how orders route or expanding data consumed.
  • Views on integration remain divided and do not neatly fall into division by commission size, account type and strategy.
  • Buy-side tech projects that consolidate trading applications and build routers will change the way brokers can and must deliver services, rewarding those who partner closely with the buy side and use transparency and good governance to build trust.

The 29-page study with 34 exhibits can be downloaded by TABB Research Alliance Equity clients and qualified media at To purchase the study, write to [email protected].

About TABB Group

Based in New York and London, TABB Group is the research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb.

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