Trends in Equities Trading 2015

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The Disappearing Sellside Middle

A new GreySpark Partners report, Trends in Equities Trading 2015, analyses the implications for investment banks of how the long-standing relationship between equities markets volatility and the ability of bank equities trading businesses to generate profitable levels of revenue now appears broken. Before 2009, volatility historically played a key role in the ability of Tier I and Tier II banks to generate sustained levels of equities trading-related revenue. If volatility in the markets was down, then sellside equities trading revenues would typically increase as a result of commissions generated by nominal agency business. Likewise, if volatility in the markets was up, then banks could generate equities trading revenue from the P&L associated with manufacturing equities derivatives, and the banks could also rely on positive levels of equities trading revenue from proprietary trading.

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However, starting in 2009, the historical relationship between volatility and sellside equities trading revenue began to break down. The reason: post-financial crisis regulations in the EU and US placed new limits on the ability of banks to generate revenue and profits from proprietary equities trading. Meanwhile, between 2006 and 2014, GreySpark analysis of the gap within sellside equities trading businesses between the total amount of equities volumes traded globally per year versus the amount of e-trading capacity banks had to meet client demand for that liquidity showed that the gap is narrowing.

Faced with a new profitability paradigm that was – in part – defined by decreasing levels of equities liquidity fragmentation, the sellside responded by cutting jobs and by spinning-off or shutting down proprietary trading desks. As a result of these cost-cutting exercises, the long-term outlook for the profitability of sellside stock trading businesses in 2015 now appears better despite the fact that levels of volatility in key equities markets remain near historic lows.

The sellside’s rationalisation of its equities trading business models has not occurred without consequence. As banks reduced the scope and size of their equities trading businesses – which were, in many cases, global franchises – buyside clients responded by attempting to fill the void left by the sellside. In many cases, the largest buyside firms are developing their own global equities trading businesses in 2015, taking advantage of cost-effective, sophisticated trading stacks to create centralised equities dealing desks that are based on a single, cross-asset trading position.

This report characterises how the end of a slow reduction in the ability of banks to oversupply buyside clients with cash equities trading capacity is reshaping the future aspirations of the banking industry’s cash equities business and trading models. In 2015, as buyside clients increasingly compete with banks in running automated equities market-making businesses to service their owns demands, each bank is faced with a choice: monetise the whole equities franchise by increasing investment in the areas where strengths traditionally lie; or reduce the multi-regional or global ambitions of the equities trading business to cut the cost-per-trade associated with an overcapacity of trading technology compared to client demand.

Published on: 27 Aug, 2015

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Trends in Equities Trading 2015 – Table of Contents

  • 1.0 Inflection Point: a Reduction in Equities Trading Capacity
    • 1.1 The Impact of Regulations on Sellside Equities Business Models
    • 1.2 Sellside Equities Revenues vs. Volatility
    • 1.3 Equities Revenues: the Impact of Over-competition as Excess Capacity is Removed
  • 2.0 Shift in the Balance of Power to the Buyside
    • 2.1 Equities Brokers are Going Local
    • 2.2 The Buyside is Going Global
    • 2.3 The Four Pillars of a Sellside Equities Franchise
  • 3.0 Back to the Future
    • 3.1 The Impact of EU Regulations
    • 3.2 The Disappearing Sellside Middle
  • 4.0 Appendices
    • 4.1 Glossary of Terms
    • 4.2 Table of Figures
    • 4.3 Methodology