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It's no secret that commissions have been in decline for the past several years. But with the prospect of a choppier trading environment coupled with the possibility of a U.S. economic slowdown, buy-side firms might put even more pressure on their brokers to further cut commissions. Clearly, the bigger desks, such as Merrill Lynch and Morgan Stanley, will survive. But from the customer perspective, the services they provide might begin to change. Specific to the trading environment, this means a few things for accounts such as Accipiter, a $600 million hedge fund that focuses on healthcare stocks.
Accipiter Capital Management
The bigger desks, if they haven't already done so, will choose their buy-side customers wisely when it comes to capital commitment. Undoubtedly, this has already taken form. But there is more to come should commissions compress from current levels. Buy-side firms that are not top commission payers but value certain sell-side trading desks -- in terms of idea and or trading flow -- will need to offer more dialogue and information in order to keep the relationship two-sided. In other words, if you can't pay a certain desk $500,000 to $1 million per year but still want its trading color, it might be necessary to "open up" more in terms of stock-specific analysis -- the currency shifts from actual commission dollars to information flow. Feedback from most sell-side trading desks in this regard has been positive, and in some cases they would prefer the in-house stock analysis as opposed to the commission dollar.
Being on the buy side, you hear a lot of sell-side feedback in terms of its ability to continue to add value. There obviously are many that think the sales-trading role could someday be a thing of the past. In my opinion there could be contraction from current levels, but the role itself will not disappear -- assuming you are a bright, hard-working individual. In order to add value in 2008, the advertising of order flow will become much more important.
There obviously are those customers who have restrictions on this. But for others, it will be important to make sure the right customers know exactly what is taking place in certain stocks. The simple and obvious reason for this is the growing use of crossing networks. With many of these systems, order flow is communicated automatically to potential contra parties -- for the buy-side trader, it becomes almost impossible to miss. Sales-traders of the future will need to have specific knowledge of exactly what their traders are doing in certain stocks so that seamless transactions similar to crossing networks are possible.
As a member of the buy-side community, there are obvious criteria we use when evaluating with whom we choose to execute; from my seat, the most important is liquidity. Defining this is not always straightforward. But in regard to commission compression and the role of the sales-trader, it's simple: Keep us up on your trading flow -- that is value-add in and of itself and something many buy-side firms will continue to pay for.
Read about issues that other buy side traders think will be critical this year:
 Dan Mathisson Managing Director, Head of Advanced Execution Services (AES) Credit Suisse |
 Timothy Christiansen Equity Trader Sawgrass Asset Management |
 Joseph Rogina Equity Trader Delaware Investments |
