Are Execution-Only Agency Brokers Dying?


New York, NY – The past few years have been extremely challenging for many participants in the global financial markets, but none have had a more difficult time than execution-only agency brokers.  In fact, US equity trading volumes fell in both 2009 and 20010, and there has been an even more sharp drop in trading volumes so far this year.  It is no wonder that many suggest that the agency brokerage business is ripe for consolidation, and that to survive, agency brokers need to provide a range of other services to buy-side clients, including research.

Trying Times for Agency Brokers

According to data provided by SIFMA, US equity trading volume on the NYSE, NASDAQ, and AMEX / ARCA exchanges fell 8.9% in 2009, 11.4% in 2010, and 20.3% in 2010 through the end of June.  In fact, the average daily volume on these exchanges for the first half of 2011 totaled 3,809.66 mln shares – the lowest trading volumes seen on these exchanges since 2005.

This decline in equity trading volume has prompted many agency brokers to cut expenses by reducing staff.  Last week, Knight Capital Group announced that it was eliminating 6% of its staff, or approximately 88 people, reducing sales and trading positions in the equities and fixed income groups.  In July, ITG announced that it would lay off approximately 100 people — less than 10% of its 1,200 member workforce. Those cuts came primarily in the technology development group, along with several managing directors.  In April, Instinet Europe reduced its workforce by at least 17 people, or about 10% of its European workforce.

Buy-Side Thinks Research is the Answer

Last month, a group of 40 buy-side traders attended a Bloomberg Tradebook forum called “The Future of the Buyside Trader”.  76% of this group agreed that the US agency brokerage business is likely to shrink in the future.

Besides consolidation, these buy-side traders felt that agency brokers who wanted to succeed would need to provide a suite of non-execution services to clients.  Rob Shapiro, global head of trading and execution consulting for Bloomberg Tradebook explained that, “panelists said agency brokers cannot just be execution-only, but must provide the buyside with actionable, independent research and trading technology that aids workflow.”

Shapiro says he thinks the buy-side’s demand for research versus liquidity stems from the oversupply of trading venues that currently exist.  “They [buysiders] are saying ‘give me something I don’t have enough of.  I want workflow solutions or trade ideas’ not more places to trade.”

Besides research, buy-side participants felt that successful agency brokers would need to become more like trading consultants, providing advice regarding electronic trading, workflow integration, the mathematics behind algorithms, market structure, etc.

Brokers Adding Research

Agency brokers have come to the same conclusion over the past twelve months.  Last October, ITG acquired 100% of data driven independent research firm, Majestic Research for $56 mln.  Robert Gasser, President and CEO of ITG explained the acquisition, “Clients pay for research, they pay for content and they pay for things that add to the portfolio construction part of the process.”  The team at ITG felt adding research to their execution capabilities would give buy-side clients a reason to pay them more.  ITG followed up the Majestic Research acquisition by purchasing independent energy research provider, Ross Smith Energy Group for $38.5 mln in July, 2011.

In October, 2010, MF Global acquired well-known independent policy research provider Washington Research Group from broker Concept Capital.  The terms of the acquisition were not disclosed.  Washington Research Group provides research to mutual funds and hedge funds and is frequently ranked in the top three in Institutional Investor’s annual research rankings.

Rather than buying existing research firms, some agency brokers have decided to hire their own internal research team.  In February of 2011, Williams Capital Group, a New York-based brokerage firm, added six equity analysts, as it launched an in-house research department.  Matt Rochlin, head of equities at Williams capital explained the move, saying “Clients are under pressure to get as much as they can for their commission dollars.  For us to add value and to compete for those commission dollars, research is very important.”

Instead of buying, or even building their own research departments, some agency brokers have decided to offer research to their buy-side clients by partnering with existing independent research providers.  Two agency brokers who have been marketing third-party research to their buy-side clients for quite a long time include Instinet, and Dallas-based CAPIS.  A number of brokers have jumped into this market, including Bloomberg’s Tradebook division.

Integrity’s Assessment

It is clear to the team at Integrity Research that the agency brokerage industry is experiencing a very challenging market environment as trading volumes plummet.  In addition, buy-side clients are becoming more demanding, requiring other services besides pure execution like research or trading and portfolio construction advice.

This leads us to conclude, like the traders from Bloomberg Tradebook’s “The Future of the Buyside Trader” panel, that the agency brokerage business is likely to experience a significant period of consolidation over the coming 12 to 18 months.  We also suspect that those agency brokers that succeed will need to find some way to provide their clients with additional value-added services.


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