Morgan Stanley took first place among a dozen bulge-bracket brokers ranked for providing electronic trading services to buy-side clients, according to the Financial Insights 2007 Electronic Trading Services Ranking, which was released at the SIFMA Technology Management Conference in June. Brokers were evaluated in five categories: direct market access (DMA), algorithmic trading, transaction cost analysis (TCA), dark pool access and execution management system (EMS).
While brokers were ranked in each category, Morgan Stanley placed first overall, followed by Goldman Sachs in second place, Credit Suisse in third, Merrill Lynch in fourth and Lehman Brothers in fifth. The other firms that were considered are Banc of America Securities, Bear Stearns, Citi, Deutsche Bank, HSBC, JPMorgan Chase and UBS.
Financial Insights first conducted a survey of 43 buy-side firms looking at how they choose their brokers, what kind of traits they value in broker relationships and what concerns they have about dealing with the sell side. The research firm also spoke with other buy-side entities and industry associations, as well as independent electronic trading systems (such as alternative trading systems) before going straight to the bulge-bracket firms themselves.
"The goal was to identify how firms are differentiating their services in each of these five areas," says Julio Gomez, global head of research at Financial Insights, an IDC company. "We were less concerned with features and functionalities and more concerned with what are the differentiators in each of these otherwise commodity services."
Determining the Results
In the case of DMA, it was not just about trading cash equities. According to Gomez, his team looked at whether the brokers have access to other asset classes, such as FX and options, and other markets, such as Europe and Asia. "We're also looking for ways in which they're making smart order routing smarter," he says.
With algorithmic trading, the research firm examined whether the brokers offer customization. "It's great that brokers offer a whole set of algorithms, but everyone has algorithms," Gomez observes. The question is, "How much do you allow the buy side to customize those algorithms on their own?" he adds. For example, in the extreme case, Lehman Brothers provides a tool kit for customers to build their own algorithms.
On the topic of TCA, Financial Insights looked at whether a buy-side firm could upload transactions from multiple brokers and whether it could customize the benchmarks it uses to do TCA, according to Gomez.
With brokers offering dark pool access, the research firm asked brokers how many sell-side partners are in their dark pools and how many other dark pools they connect to, Gomez relates. Another area of differentiation could be access to retail proprietary order flow, he adds. For example, "Citi has retail order flow and Goldman doesn't," Gomez notes.
To judge the quality of the brokers' services in the EMS category, Financial Insights looked at factors such as how the brokers handle a flood of execution messaging traffic coming back into the OMS (order management system), Gomez reports. Other considerations were whether the broker allows the buy side to customize the frequency and characteristics of those reports, and whether the buy side is able to customize hot keys on the EMS or build their own hot keys.
In the end, according to Gomez, Financial Insights found that electronic trading services isn't a commodity business. "There really are a lot of firms doing different things," he says. Participating brokers either had all the functionality that the research firm examined or had relatively short-term plans for adding it, he notes.
"The market is evolving quickly to meet the competitive pressure that the buy side demands," Gomez concludes. While the buy side has driven down the cost on these low-touch services, he says, in addition to speed and reliability driving their choices of brokers, "We've found a big component of the differentiation is based upon customization and flexibility."Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio