With recent market volatility and the ongoing fall out from the credit crisis, Jim Morrow, chief operating officer at Capital Institutional Services (CAPIS), an institutional agency broker based in Dallas, sees buy side traders wanting and needing different things from their trading partners.
“We’ve seen trade volumes go up by three times in recent months,” he says. “In volatile markets the buy side is turning to block agency traders and there’s an increase in the use of people, the human touch, when they need to get blocks done fast.”
While he says this is also being driven by less capital commitment in the market, Morrow sees borrowing stabilizing in the next year but says the popularity of the agency model will continue to dominate.
Morrow also sees opportunity for small and mid-size brokers. “They fill in the spaces left by the consolidation taking place at the big shops,” he says, adding that boutique firms that provide niche services will begin popping up in the next year.
Morrow explains that in these highly volatile markets, it’s become a bit more difficult to use dark pools because the markets are moving so fast. “Dark pools are more about finding liquidity than price and everyone is hunting for liquidity now,” he says. “The true dark pools are mostly preferable though and we definitely still see dark pools as part of the trading strategy.”
In light of the consolidation and changing market conditions, Morrow also sees the buy side re-evaluating existing trading relationships and seeking out new ones. “Their algorithms or trading systems might not be working as well as they had previously with the new market volatility,” he notes.
He says the buy side will also be looking to re-build personal relationships with traders and trading teams as firms continue to hire and fire in light of consolidation and other market circumstances.
As for the buy side business outlook in general, Morrow says that it’s going to be different going forward. “They’re now faced with how to keep the business going with less fees coming in and fewer assets, it’s a different environment now,” he says. But Morrow adds that he does see overall volatility lightening in the coming year as the markets begin to stabilize.