Brokers Need Focus, Client-Base Knowledge to Remain Relevant

The results from Bloomberg Intelligence's new U.S. Institutional Equity Trading Study show that money managers have different needs, based on factors such as size, style and type. In this article, Bloomberg Intelligence's Larry Tabb, Director for Market Structure Research, and Jackson Gutenplan, Research Associate, review the study's findings and dig into the nuances of what institutional investors want from their brokers.

Buy-siders like to be treated well, and rarely turn down research, execution information or liquidity, but their reasons for hitting the “buy” button are more nuanced and vary by need. Our U.S. Institutional Equity Trading Study shows that more want snappy, easy-to-use algorithms, while service preferences differ based on fund size, style and type. Knowing the client base is requisite to earn a manager’s business.

Algorithms: The most important service
Equity brokers offering the best trading algorithms and high- and low-touch service garner the biggest share of a large fund manager’s commission wallet. Algorithms drive 43% of order flow and have become the most critical brokerage product. The importance of “algos” surpasses the value of high-touch relationships, personified by daily research calls and notes, while low-touch services provided to support electronic tools are increasingly significant. Improvements in these categories will help brokers garner more business.

Our graphic displays each service respondents identified in our study and an average 1 to 5 ranking, and segments the brokers’ offerings by size in relation to the average. Bars above/below the axis chart importance vs. the mean.

Source: Bloomberg Intelligence

Best have algorithms, high-touch coverage, blocks
COVID-19 has changed the demand for brokers’ institutional equity trading offerings, with algorithms, high- and low-touch services and block liquidity increasingly important to buy-side traders. Execution consulting, central risk books and trading analytics are less significant for brokers to attract commissions. This change in the pecking order aligns with the volatility-driven demand for algorithms, service and liquidity since the pandemic. The decreased importance of central risk book capital, trading analytics and market color, we believe, is driven by banks’ diminished desire to extend capital, plus the increased use of algo wheels and tools to help traders automatically select algorithms.


Source: Bloomberg Intelligence

Larger funds want risk capital, not research
Brokers need to know their demographic to ensure they’re investing in the appropriate offerings. While all funds want great algorithms, the biggest respondents to our study have different demands than mid-tier and smaller managers. Capital demand is the most significant difference. Larger funds typically execute heftier trades, so their trading impact is larger. This pushes larger funds toward central risk book capital, and more specifically to unwinds, or when brokers are unwinding their capital positions. It’s less risky to interact with capital when the broker and fund are natural opposites and not competing against each other.

Source: Bloomberg Intelligence

Smaller managers need crisp research
Performance dictates whether smaller managers succeed or fail, as they lack the scale, distribution and marketing power of their larger brethren. To perform well, smaller managers need to be right more often. While performance is important to larger managers, scale is more significant to them. As smaller managers don’t have the scale to do the analysis and research of the larger firms, nor are their trade sizes as likely to sway the market, they’re more dependent on broker research and less reliant on capital. In being smaller, these funds can’t aspire to the balance sheets of larger managers.

Source: Bloomberg Intelligence

This article,”Brokers Need Focus, Client-Base Knowledge to Remain Relevant,” from Bloomberg Intelligence was published January 28, 2021, on the Bloomberg Professional Services website. It first appeared on the Bloomberg Terminal.
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Larry Tabb is Director for Market Structure Research at Bloomberg Intelligence, which he joined in 2020. Mr. Tabb founded TABB Group in 2003, the research and strategic advisory firm focused exclusively on capital markets, where he was research chairman.

Jackson Gutenplan is a Research Associate at Bloomberg Intelligence.

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