Printer Friendly
Survivors, Predictions and Future Trends
Seth Merrin, CEO, Liquidnet, who's known to speak his mind, didn't have trouble cutting to the chase during his speech. In his short time on stage, Merrin made some shocking comments, predicted the future of the buy- and sell-side relationship and announced which type of firms had the best chance of survival.
SURVIVORS
It was clear at the show that sell-side firms would have to provide new value propositions to the buy side in order to survive. Merrin believes that the buy side will trim the number of brokers it uses for execution from the approximately 100 firms each buy-side firm uses today to just 10 to 15 firms in the future.
The Sell-Side Survivors Will Be:
1. Independent research firms.
2. Execution-only firms.
3. Bulge bracket brokers - their volumes will increase at the expense of the lower-tier firms.
Merrin's Crystal Ball - 4 Predictions to Watch:
1. Sell-side traders will migrate to the buy side.
2. The buy side will directly execute 95 percent of its own orders.
3. Sell-side brokers will become more technology-based electronic jockeys.
4. There will be added pressure for and enforcement of unbundling.
---
Potential Outcome of the Value Shift From the Sell Side to the Buy Side
1. Specialist firms' revenue will decline as their participant's operations decline.
2. There will be a significant decline in broker capital commitment.
3. There will be a decline in traditional agency block trading.
4. Broker commission rates will continue to decline.
5.ECNs will gain significant NYSE market share.
(Ed. note: the trade show took place prior to the NYSE-Arca announcement.)
6. There will be further consolidation of ECNs and Alternative Trading Systems.
7. The largest brokers will gain market share from the second-tier brokers and below.
8. Profitability will be negligible.
---
A Buy-Side Perspective
Peter Driscoll, Nothern Trust, made his own predictions during his speech as to how the buy side will change going forward:
On Regulation
"The buy side will be more open to discussion with regulators. We won't fly under the radar anymore. We'll be more involved with the SEC and FSA. We will become familiar faces to the regulators. We'll be more involved in implementation of rules, and the buy side will call for a major voice in how these rules are shaped."
On Technology and Talent
"Technology will continue to develop. Tools will develop and the buy side will have to know how and when to use them. This will include tools like Liquidnet, Posit, etc."
"In addition, the buy side will have to pay for talented people." b
---
Answering to the Audience
After Mike Stewart, managing director and head of global cash equity trading, Merrill Lynch, addressed the audience, the audience addressed him with the questions below.
1. Will there be a need for a different skill set for sales and trading in the future?
"Trading departments were siloed in the past by execution product. Increasingly, the client now accesses these products through a single sales trader, who is the gatekeeper across the product spectrum. As a result, there is an intense requirement internally for training around a broader set of products, education regarding the suitability for usage and learning new tools which monitor orders wherever they may be on the floor."
2. Will trades that are executed via algorithms be evaluated in the same way we evaluate the human trader?
"Largely, yes. Although there are other contributing factors, in general, in both cases we establish a benchmark and an expected cost at the outset of a trade and then evaluate our actual executions against them."
3. Do you envision zero commission trading?
"No, not immediately, and regulation doesn't appear to be pushing us in that direction in the short term. However, we could see something looking more like the fixed income market over time, and we do expect brokers to be using and interposing additional capital over the medium term."
