An increased focus on best execution in Australia means broker selection will be tightened up significantly, which will result in a significant reduction in broker panels overall, delegates at the recent Investment Implementation Summit heard.
“We are far more strategic across all our activities, our decisions, the counterparties that we use, the vendors that we select, the systems that we actually put in place and that is ultimately resulting in fewer more strategic business partners. As an example, just on the equity side globally, we have north of 100 execution brokers across our panel [and] we predict that figure to halve [as a result of the MiFID II implementation],” Joe Kassel, Global Head of Dealing & Exposure Management at AMP Capital said.
Those that make it onto the panels are more likely to see more flow directed their way. To get that coveted spot, brokers will need to excel in a number of different areas.
Stuart Anderson, director transition management at Blackrock, told the audience that while transaction cost analysis is important, best execution involves significantly more than just price.
“Best execution is generally defined as the most favourable outcome depending on a range of factors, the most common and obvious one is price, but it is a lot more than that and in many cases in fact price is one of the least important factors in selecting an executing broker. It can also be fastest execution, the broker that is most likely to fill an order or has the best access to liquidity all the way through to back office factors like operational support, technological connectivity and creditworthiness as well. There is no point trading with a broker who is going to give you a fantastic price if they are out of business the next day,” Anderson said.
Steve Strain, transition manager at Mercer Investments told the Investment Implementation Summit that qualitative factors also featured heavily in his broker assessment. “Financial analysis is also the prerequisite of any trade but beyond those headline figures we really have to look at whether those numbers can stand up. That qualitative analysis covers everything from counterparty risk to speed of execution, access to liquidity and broker integrity. We’re dealing with large trades, so integrity and having the processes to minimise leakage is very important,” Strain said.
“At an individual level each one of those brokers should excel and offer an advantage over their peers in at least one field, and then taken as an aggregate you would look to achieve a spread of excellence across all those selection criteria. It is also an ongoing process, you need to be able to create repeatable investment processes that demonstrate on a consistent statistical basis that you are achieving a favourable outcome to your clients,” Anderson added.
The tougher environment will likely put brokers under pressure, in particular those that have traditionally relied on research to drive flow. Smaller brokers that do not excel in a specific niche may also struggle going forward with panellists agreeing that particularly in equities, there is a “strong case” for saying there are too many brokers in the market.