Securities firms will continue to increase their trading volumes and remain the dominant players in large complex trades because automated systems are not yet sophisticated enough for such transactions, says a new report by Moody's titled, "The Impact of Alternative Trading Systems on Market Making at Securities Firms." Moody's believes established firms will increase their business, reach a broader customer base, and continue to provide liquidity.
The threat to those firms, contends the report, comes in the form of often making obsolete the need for market maker intermediaries. Firms such as TradeWeb and Island threaten market making activities by increasing transparency, especially in small orders of liquid securities. The result is margin compression. Moody's found that many firms are actively responding to margin compression by making use of the same technology their competitors are using to automate execution and cut costs.
Rising trade volumes and increased use of the Internet to reach customers is also helping to fight against decreased profits associated with margin compression.