From the Senior Vice President
The end of the sell side?
When I joined Celent in 2001, coming from Paribas, I was puzzled by the terms "sell side" and "buy side." In France, where universal banks dominated the securities industry, housing an umbrella of services from retail banking to asset management and capital market operations, this approach of market segmentation was not very popular. The first time I heard the term sell side, I asked my colleagues what it meant, and their answer was quite simple: "Sell side are large dealers that hold significant inventory of securities and therefore are able to sell stakes or issue to a counterparty: the buy side." For the past 10 years, I have embraced this concept. Today however, with the new regulatory framework being implemented on both sides of the Atlantic, I'm again questioning this idea of such a market split.
We are seeing signs that the traditional broker-dealer business model is quickly changing to a broker-only model. Large sell side institutions are already deleveraging their positions and reducing their securities inventory, notably in fixed income. With the implementation of the new Basel regime, traditional sell side will not be able to leverage their balance sheet to maintain their dealer operations, and therefore are already repositioning their business model around their brokerage operations either by reinforcing their investment in advanced automated trading technologies and increasing their global reach, or, in the case of Tier II players, by selling noncore activities to focus on niche markets such as nonlisted equity.
With that trend accelerating as we get closer to the implementation date of Basel III leverage ratio in 2018, one can question if the division of the market between sell side and buy side will make sense any longer, since sell side firms could mostly operate as intermediaries. Obviously the largest players will be able to maintain dealer activity despite being smaller than their pre-crisis level, but that evolution will have a major impact on the industry. Dealers' operations are central to the current functioning of the securities industry, and therefore market structure will have to change.
For example, the role of dealers in the fixed income primary market will have to be reconsidered, and large asset managers should eventually be invited to the party if issuers want to ensure that their new issues will find buyers. Markets that were structured around two distinct sets of participants, with an interdealer market and a dealer-to-client one, will also continue to evolve, and the differentiation between the two sides will continue to blur and potentially disappear. Despite all that this industry has been through in the past four to five years, we have hardly seen the tip of the iceberg of market structure changes that are coming our way.
As far as the terminology is concerned, eventually, we should end up with a new segmentation of the market between the managers of assets and the facilitators who transfer assets to other managers.
Senior Vice President
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From the Celent report Complex Event Processing: Looking Beyond Algorithmic Trading
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21-23 August 2012
Broker Dealer Summit
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