The Changing World of the Buy-Side Dealer

This research looks at the significant changes to the ways in which trades can now be executed. These changes have been driven primarily by regulatory change and the opportunity to achieve better dealing outcomes at a cheaper cost to the client for lower operational risk.

Drivers for change

Regulators have taken away the stock exchange monopolies, creating competition that is increasing market fragmentation where orders in a single security can be executed on many different trading venues. They have brought focus to the dealing function by requiring Best Execution policies to be written, approved, adhered to and monitored.

Firms also have to be more transparent in describing the way in which they spend client commission. Clients and investment consultants are becoming more knowledgeable about the dealing process and are starting to check that firms are looking at dealing efficiencies and careful spending of client commission.

Technological advancements are giving firms greater ability to participate more actively in the market with tools that have previously only been available to their brokers.

Ownership and fee structures around the assets will determine the boundaries on what firms can spend in reaction to these drivers for change.

This report looks at the growing number of dealing methods and trading venues available to the buy-side dealer:

• A growing number of trades are now being executed using broker algorithms and direct market methods at a much lower commission rate.
  
• Multi-lateral trading facilities (MTFs) are trading venues operated by brokers or exchanges where orders can be executed. Buy-side firms can access these venues to search for liquidity.
  
• Smart Order Routing technology is being used to aggregate markets and to determine the best venue(s) to route the order, to achieve the best execution result for the client.
• It is possible to access alternative trading methods through most leading vendor OMSs. However Execution Management Systems (EMSs) are growing in popularity as the primary tool for the buy-side dealer.

The research goes on to look at how these methods are being adopted and the reasons why, whether it be an increase in competitive advantage or peer pressure, for example. The report then asks if firms are taking on the costs and regulatory risk of executing orders for increased costs in systems, people and training for a relatively small gain in performance. This is followed by a look at the organisation of the dealing function and the role of the dealer in investment management firms.

 
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