Self-help for sell-side survivors
The global financial crisis was an industry-changing event after
which the markets will never be the same again. And small-to-medium-sized
brokers need to evolve if they are to survive, according to James Blackburn, director of product marketing
for Fidessa’s software-as-a-service business.
says their fortunes will depend on their ability to stay relevant to a buy-side
which has drastically changed how it engages with brokers.
past, after a market-shifting event, firms would be forgiven for hunkering down
and waiting for the inevitable uptick in the business cycle,” says Blackburn.
“But now there's a real sense that the events of the past few years represent a
structural rather than a cyclical shift in the operating dynamics for the
sell-side and for the industry as a whole.”
He says the
‘less-informed’ buy-side client is a distant memory and a number of events have
conspired against small- and medium-sized brokers.
regulatory environment has become more onerous and the rate of change
relentless, bringing with it business complexity and cost. Transactional
volumes are obviously the primary fuel that powers the sell-side but with
volumes on a downward trajectory since their 2009 peak, competition is fiercer
than ever,” says Blackburn. “It’s essential brokers adapt and evolve, finding
ways to stay relevant and add value to an increasingly sophisticated and more
has recently penned a white paper which investigates how these events have
impacted these medium-sized industry middle-men.
The outsourcing catch 22
for many of these smaller players, the whole landscape is becoming impossible
to navigate without the right technology and expertise. Often small brokers are
now outsourcing much of their technology – preferring a rental model rather
than an ownership model for technology to access the markets.
execution may appear, on the face of it, to be a compelling decision to help
reduce costs, but for small-to-medium-sized brokers there is a real risk of dis-intermediating
themselves and becoming less relevant,” says Blackburn. “If all you’re doing is
acting as a middle-man, adding no value to the increasingly complex execution
process, then clients will quickly devalue those services.”
For Blackburn, there are two ways smaller players can stay
relevant to the buy-side. They can provide unique and incisive research, or
they can develop an execution consultancy role.
“Either way, they need to identify, focus and then deliver
on their true value proposition,” says Blackburn.
Blackburn writes in his white paper that at a pre-trade
level the new buzzword is ‘actionable’ data.
“In today’s über-competitive environment, this means being
the first to react – locating and combining different pieces of information and
turning them into revenue-generating opportunities. This helps turn good
traders into great ones and, more importantly, makes the whole firm stand out
from the crowd,” he writes. “Achieving this is by no means easy, but the key
lies in combining information that is publicly available about a particular
stock with information held within the firm itself.”
In this way, Blackburn says a broker might receive an order,
look at which buy-side clients are already holders of the stock and combine
this with custom historical information about previous activity, trading
patterns or expressions of interest and news flow.
“Done correctly, this gives the sales trader an automatic
action list providing the best chance of optimising the outcome,” he tells the
Best ex gurus
For Blackburn, the possibility of more firms becoming
execution consultancies is also compelling: “These guys are already outsourcing
their connections to larger brokers, so why not outsource to multiple providers
so that you can look to identify the best offerings from those available, thereby
becoming an experienced navigator of liquidity for clients?”
He says presently only a handful of outfits are providing
such a service but there is room for many more. He cites London-based mid-tier
agency broker Redburn Partners as a particularly good example.
“The buy-side should want those types of guys to succeed,
because that’s where they are going to realise true value and best execution,
but their needs have become a lot more complex,” says Blackburn.
Blackburn says Fidessa is presently working on real-time analytics
“Buy-side firms know whether or not their algos are
executing well. This analytics service allows them to identify the outliers,
then move to intervene to proactively influence the outcome, all the time
building data to determine which services to use and when,” Blackburn says.
“But at the end of the day, these are all just tools, and what brokers need to
work out is what value they want to add to remain relevant to their clients.”
Only recently are many small-to-medium-sized brokers
building into their business models external validation of their service propositions,
and Blackburn says much more of this needs to be done: “The buy-side is effectively
marking the sell-side’s homework anyway, so the sell-side needs to be much more