TradeTech 2011 Conference, London – April 19th 2011
The SunGard panel session at this week’s TradeTech conference addressed the thorny issue of how regional brokers can compete with their global counterparts in today’s securities market. Is it possible for an agile, domestically-focused broker to outmaneuver a global player? Or in an increasingly IT-dominated market, is it unrealistic to expect a small, local firm to keep up?
All panelists agreed that any broker, large or small, has to be able to add value, particularly when most investment managers are looking to consolidate their broker lists. According to Michael Sits, regional manager for capital markets consulting services at SunGard, regional brokers are best served by focusing on their domestic markets – demonstrating a knowledge of the local market for outside investors and engendering loyalty from local investors by offering them a full and preferential service.
Partnerships with global brokers may actually be one of the best ways for regional brokers to compete in today’s market, but how should such alliances work? First and foremost there have to be suitable synergies, as partnerships between two brokers with the same business model rarely work. And there may be mutual benefits from exploiting each other’s liquidity. “Partnerships change over time” said Bradley Duke, managing director at US-based broker Knight Capital Group: markets and businesses evolve, and requirements change.
A major attraction for regional brokers is often the potential access to a much larger technology resource. “Most clients want a full suite of services from all of their brokers, regional and global,” said Matthew Cousens, head of AES sales at Credit Suisse. ìA regional broker may not have a full set of algorithmic trading tools so we often see requests to access our technology but to keep their clients.î
“We feel comfortable with the partnerships we have with brokers that provide us with technology,” said Asa Palm, head of electronic trading at Sweden-based SEB Enskilda. “For example, they give us the ability to cross our flow and to create a pool within a pool without having to create our own dark pool and deal with all of the accompanying regulation.”
Regulation is one factor that could prove influential in the future fortunes of local brokers and the cost of compliance is yet another investment that has to be considered when a local broker looks to expand. “It is another instance of asking if you add value,” said Palm. “In our local markets we definitely feel we add value and we know the local regulators well. But having recently opened a Hong Kong office to trade Asian stocks, we will not be taking direct membership of all exchanges in that region.”
The 2007 MiFID Directive, which was meant to increase competition between brokers, has actually had the opposite effect in some respects. The IT costs involved with adapting to the new post-MiFID market structure have played into the hands of the brokers with the deepest pockets. According to Cousens it is another reason why regional brokers should pursue more technology outsourcing arrangements with global brokers. “It may not make them more competitive but it will keep a lot of them in business.”
What is important is that the regulatory burden does not become too much for local brokers and prevent them from expanding and innovating, said Bradley Duke. “All global brokers started out as regional brokers, so regulators have to ensure that any new rules do not crush the developing regional players.”
In closing, Michael Sits commented that technology can help firms cope with the changes in regulation and market structure, for example through the increasing availability of managed service options to assist in addressing these challenges cost-effectively.
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