Capital Markets 2.0: The Future of Institutional Brokerage and Market Making Operations

by David Easthope, May 27, 2009
Industry Trends
Global, EMEA, North America


As a result of stressed capital markets, a retrenchment in IT spending, and a structural realignment of the industry, brokerage business models are in transition. An empowered buy side is demanding increasingly targeted and customized solutions from brokers.

A Darwinian reshaping of global capital markets is under way. The previous institutional capital markets framework emphasized brokers building and providing advanced execution and other bundled services to the buy side on an often siloed and “me too” basis to a wide array of customer types. Today, however, an empowered buy side is demanding increasingly targeted and customized solutions from counterparties. Moreover, greater scrutiny is being paid to the health and sustainability of these trading counterparties, especially prime brokers.

In a new report, Capital Markets 2.0: The Future of Institutional Brokerage and Market Making Operations, Celent outlines the evolution of the brokerage landscape and predicts winning and losing models along with in-demand services. Celent looks at both the sources of demand from the buy side and  the unique and differentiating twists with how execution and other services will be provided.

In response to buy side demands and their own set of pressures in the form of weakened revenues, slimmer profit margins, regulatory uncertainty, and a renewed emphasis on risk management, brokerages are undergoing a rapid evolution. "The prime brokerage industry is consolidating, and competitors are offering new twists. In traditional execution brokerage, previously unthinkable ideas are also being considered and pursued," says David Easthope, senior analyst with Celent's Securities & Investments Group and coauthor of the report.

Naturally, a Darwinian process creates winners and losers. Under Capital Markets 2.0, we believe certain execution models will thrive. At the same time, the next few years will be about a return to basics. Many brokers will revert to focusing on best execution while others will outsource more execution services and offer only boutique services. "As the technology arms race at brokers continues to dissipate, constrained resources across the board mean that fewer Tier II and III brokerages will attempt to compete based solely on technology," says Chermaine Lee, analyst with Celent’s Securities & Investments Group and coauthor of the report.

Waiting to see where the sell side slips up is a new breed of market makers and specialist trading firms, which, in this volatile and liquidity-challenged environment, will be stepping up. How these technology-advanced market makers fill the liquidity void will depend on the success or failure of the brokerage firms to evolve in this new framework.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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