It’s more than just cost-cutting. But costs are being cut – and more are likely, forcing a knock-on impact on the brokers that serve them.
Standalone dealing desks within asset managers are still relatively new. Historically, it was portfolio managers themselves that executed orders. But as trading has become more sophisticated, particularly in equities, dealing desks in fund managers have grown in prominence – and cost.
That has led many managers to wield the knife to control spend in recent years. Fidelity International decided to merge its fixed income and equity trading teams earlier in 2016, cutting some roles and creating a single, global head of trading instead. Schroders has done the reverse, eliminating its global head of trading and reverting to heads of individual asset classes instead.
The world’s largest fund manager, BlackRock, as well as Baring Asset Management, State Street Global Advisors, Standard Life and Axa Investment Managers have all seen the departures of longstanding heads of trading, requiring less senior members of staff to step up.
The changes have all been subtly different, but the net result has been the same: a layer of management have been removed and the size of dealing desks has shrunk. Those traders that remain are increasing their take-up of electronic tools and being tasked with trading multiple asset classes rather than specialising in one.
The number one driver of these changes is cost management. Independent consultants have put the cost of a buyside trader at as much as £300,000 a year. Multiply that as much as a dozen traders or more and it quickly becomes a significant outlay.
Costs are rising across finance, but in asset management in recent years they have become a big issue. Increasing regulatory attention and a shift from active to lower margin passive investment have also led to squeezed margins.
As the pressure rises on asset managers to cut costs, trading desks are increasingly in the firing line and changes in market structure are making it easier to justify such moves.
First up, is the move to passive management, which has effectively moved more and more trading to the end of day, when index funds are priced, requiring less trading expertise at other times. When combined with the continued rise of electronic trading – a report this week by Greenwich Associates found that large US buyside firms have increased their use of algorithmic trading by 10% over the past year – it means that traders are less busy than they were five years ago. Put simply, the buyside are no longer getting the same value out of their trading desks as they used to.
Second, the electronification and increased transparency that is well entrenched in equity trading is taking hold in other classes – such as fixed income. That means trading techniques across asset classes are converging allowing smaller, cross-asset class dealing desks to emerge.
A final factor is Europe’s revised trading rulebook, the Markets in Financial Instruments Directive, called Mifid II and coming into force in 2018. It is quite possible that the older generation of dealers simply do not have the skills to deal with the burdensome requirements Mifid II will place on buyside firms around proving best execution, the unbundling of execution and research payments, and transaction reporting.
This regulatory burden is also making the idea of outsourcing dealing to a third party a more realistic possibility, particularly for smaller asset managers. In doing so, these managers can move their trading from a fixed to a variable cost. By aggregating trading activity from several firms and passing it through to large brokers, outsourced providers are also able to offer these firms wholesale prices.
Of course, these changes depend on the specific nature of each asset manager and the funds it runs. For those with more passive strategies, electronic trading will take hold more and more.
For big active managers, dealers are likely to remain key to sourcing trades quickly and with discretion to help generate additional returns. For them, retaining old-fashioned, human trading will be important. The problem is that amid a general shrinkage of buyside dealers there may be may be less incentive for banks and brokers to provide the sales traders needed to support them.
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