Hedge funds cut trading desk budgets, says Greenwich Associates |
Date: Wednesday, October 10, 2012
Author: Emily Perryman, HedgeWeek
Hedge funds appear to be moving aggressively to take down costs associated with their trading desks in the midst of a prolonged period of depressed trading activity, according to the results of a study by Greenwich Associates.
To assist institutions in assessing and improving the operation of their
trading desks, Greenwich Associates conducted a study of 232 head traders and
traders at a variety of buy-side institutions, including asset management firms,
corporate treasuries, pensions, endowments, hedge funds, banks and insurance
companies. Greenwich Associates asked participants about the organisational
structure, staffing levels, budgets and operations of their trading desks.
Forty four per cent of hedge funds participating in the study said their 2012
trading desk budgets were reduced from 2011, with approximately 40 per cent
reporting flat budgets and 17 per cent reporting increases.
Those results suggest that hedge funds are moving much more aggressively than
other types of institutional investors to adjust the size and cost of their
trading desks in response to a general slowdown in securities trading activity.
Among the entire universe of institutions participating in the study, roughly
one-in-five said its 2012 budget was reduced from last year. About half the
institutions said their budgets were unchanged over the past 12 months in many
cases maintaining the status quo of reduced resources in place since crisis-era
cutbacks.
On the other hand, 30 per cent of institutions surveyed said their annual
trading desk budget for 2012 increased from 2011, says Greenwich Associates
Institutional Analyst Kevin Kozlowski.
For many institutions that increased their trading desk budgets last year, the
new expenditures are making up for cutbacks enacted during the global market
crisis. Some institutions, however, appear to be increasing their investments in
their trading desks in response to changes in market structure that are placing
an increased emphasis on trading capabilities, including:
Electronic trading: although electronic trading has increased trading
efficiency in many financial products, the increased use of direct-market-access
trades has shifted execution responsibility from sell-side sales traders to
buy-side desks. Greenwich Associates has projected that industry-wide,
electronic trading will struggle to grow past 5060 per cent of overall
institutional equity trading volume. One reason: institutions will hit a ceiling
in terms of the amount of execution volume their trading desks can handle at
current levels of staffing.
New execution methods: changes in market structure like the explosion
of algorithmic trading strategies and the proliferation of dark pools have been
a boon to institutional investors, who have embraced these tools to improve
pricing, source liquidity, reduce market impact, and otherwise enhance trade
outcomes. At the same time, however, the process of assessing various execution
alternatives can be time-consuming for buy-side trading desks especially those
of smaller institutions lacking the resources to maintain dedicated market
structure specialists.
Diminished sell-side support: sell-side firms are looking to scale
back their resource commitments amid a global slowdown in equity trading
activity and in the face of sharply increased capital requirements.