The Buy Side Ranks its Brokers

TABB Group’s 15th annual Institutional Equity Trading (IET) report included interviews with heads of trading at 92 buy-side firms. Here, TABB Group founder and research chairman Larry Tabb reveals the buy side’s top brokers based on commissions, algo provision, and non-electronic block trading.

TABB Group’s 2019 US Institutional Equity Trading study has aggregated the collective intelligence from 92 institutional investors on the capabilities and services provided by 70 brokers. The study analyzes the buy-side firms’ commission allocations and how each of the 70 brokers were scored in various major service categories, including commissions, trading algorithms, high- and low-touch coverage, electronic and high-touch blocks, execution consulting, research, market structure insight, transaction analytics, central risk books and capital.

There are a few general takeaways that both institutional investors and their brokers should understand as they interpret these league tables. It is critical for the brokers to understand where they sit in the eyes of their clients. The buy side’s largest brokers receive, by far, the largest percentage of order flow. The implications are far greater for hedge funds, as their top brokers tend to be their primes. According to TABB’s outreach, traditional asset managers give their largest broker 18% of their order flow, while hedge funds give their lead broker 31% of their flow. A hedge fund’s largest broker tends to also be its largest prime broker.

When ranked by commissions received, Morgan Stanley took the top honor, followed by JP Morgan, Bank America Merrill Lynch, Credit Suisse, and Goldman Sachs, which rounded out the top five brokers among the 70 for which TABB received feedback.

While Morgan Stanley led the league table based on commissions, JP Morgan catered to more of the largest buy-side firms, with more than $150 billion in assets under management, than any other broker. JP Morgan was followed by Bank America Merrill Lynch and Goldman Sachs.

While commissions are a critical gauge of the sell side’s importance to asset managers and hedge funds, the buy side ranked algorithms as the top reason why firms allocated order flow to a particular broker (see chart, below). This is a significant change from last year’s study, when the buy side identified high-touch coverage as the most critical broker service; but it was followed closely by trading algorithms.

The buy side ranked the combined Virtu-ITG as the top algo provider. If, however, Virtu and ITG were ranked separately (as mentioned by the head and senior traders we interviewed), JP Morgan would have been the most extensively used algo provider, followed by UBS and Sanford Bernstein.

Source: TABB Group’s 2019 US Institutional Equity Trading study, ‘Broker League Tables’

If buy-side firms prioritized their order flow in the same manner that they ranked brokers’ services, their top broker would be JP Morgan, followed by Goldman Sachs.

Given the challenges with sourcing liquidity, another critical factor in today’s market is the ability to source blocks, which is very highly prized by institutional investors. JonesTrading ranked the highest in providing agency block flow, while Goldman Sachs ranked second; Liquidnet took the top spot for providing access to electronic block order flow.

For an in-depth analysis of the buy side’s top brokers, including more than 30 slides, please contact TABB Group for details on TABB Group’s latest research, “US Institutional Equity Trading 2019: Broker League Tables.”

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