The US investment management industry this year is riding a continuing wave of strong equity market performance, but the buy-side know they can’t be complacent with the tightening vice of MiFID II regulation in Europe and the rising flow of assets into passive vehicle.
That’s according to the TABB Group’s 14th annual benchmark International US Equity Trading study; ‘US Institutional Equity Trading 2018: Adapting to the New Reality’.
Based on in-depth interviews with 100 buy-side head traders during the first and second quarters of 2018 – including 82 per cent traditional asset managers, 18 per cent hedge funds with 54 per cent using a fundamental investment style, 11 per cent quantitative and 35 per cent both, and AUM from USD50 billion to USD500 billion – TABB’s comprehensive study this year covers the looming influence of MiFID II on US investment managers; reallocation of assets to passive/ETF index-based products, buy-side’s relationship with the sell side; and the buy-side’s top technology initiatives to adapt and overcome these challenges.
According to TABB senior analyst Dayle Scher (pictured), a 30-year buy-side industry veteran who wrote the study, “After lengthy one-to-one interviews, key issues emerged, such as US money managers expect MiFID II to not only influence their business in 2018 but even more over the next year or two, particularly in the areas of commissions, execution costs and research budgets.”
As Scher explains, with commission rates down across the board, more than half of all firms expect their research budgets to decline, having already dropped to USD8.6 billion in 2017 from a 2007 high of USD15.3 billion. “With low volatility and heavy competition pushing funds to negotiate harder with their brokers, migrating when necessary to bigger brokers, pressure on returns/costs, greater unbundling focus and best execution have pushed these buy-side firms toward upping their algo usage, begun in 2017.” As a result, 25 per cent of the firms she spoke with now expect their use of capital to rise due to MIFID II, with a greater impact on more than 40 per cent of medium-sized firm. “There’s a pronounced push for more capital.”
The move away from high-touch sales desks by asset managers, particularly hedge funds, has persisted as firms need to lower costs through electronic trading. By taking more trading in house and automating through algorithms, they want to cut overall costs without reducing execution quality or volumes, and to source liquidity without impacting the stock price. “The adoption of algo wheels,” Scher says, “has enabled this swing to low-touch trading as algo selection and performance monitoring becomes increasingly automated.”
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