Market volatility is forcing US equity trader to change their execution strategies, contributing to a marked decline in block trading over crossing networks, notes a new report from analyst group Tabb.
Tabb Group interviewed 61 head traders at traditional long-only institutional asset management firms representing an aggregate $12.9 trillion in assets under management (AuM), beginning in August, prior to Lehman Brothers' downfall, finishing in September as the US government announced the takeover of Fannie Mae and Freddie Mac.
Confirming that buy-side traders fear moving large blocks in highly volatile markets, 51% say their block executions have decreased year-over-year in 2008.
Laurie Berke, Tabb Group senior consultant and the study's author, Says: "The percentage of volume executed on crossing networks has dropped for the first time since Tabb began tracking it in 2004, in line with the overall drop in block-sized transactions."
Focusing further on the heightened affect of volatility on Wall Street, she adds that nearly 90% of the study's participants increased or are maintaining the amount of their order flow executed using algorithms in 2008 over 2007.
As a result, sell-side brokers' sales traders have increased their share of order flow for the first time in years, capturing 44% of total buy-side flow, up from 37% in 2007.
Asked what they need their brokers for most, over 30% said liquidity reigns supreme, and in 2008, only 13 core brokers are receiving 72% of the buy-side flow, versus 64% based on more than 15 core brokers in 2006.
However, according to Tabb Group, the trend toward ever-increasing broker consolidation has come to a halt. Buy-side firms will be diversifying their trading and commission sharing agreement (CSA) relationships, opening new opportunities for mid-tier and niche brokerage firms.
"The next five brokers outside the core group of brokers will grow market share by as much as 20% by 2010," says Berke.