Musings on Cash Equities – “So What?”

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Our job is to ask questions, clarify problems and then provide solutions. Our blog is merely us trying to articulate those experiences and raise questions to be discussed / considered. If you would like to discuss further we would be more than happy to spend some time with you.

Musings on Cash Equities – “So What?”:

My musings on Cash Equities was a 3-part epic. Probably more in-line with the second round of Star Wars trilogies than the first for quality and content.

It was also a complete failure to exercise everything I learnt during my Brevity, Clarity and Impact course... though mentioning Ronnie Wood and suggesting people are paid too much clearly had an impact.

So, the question that needs to be asked is: what should a cash business look like in the future?

Here is my vision; it is not revolutionary, which is kind of the point. It is obtainable with some commitment and discipline:

1. Think global. Not build global. Assume that MiFID II will have an impact and be perpetuated globally. It will take time, but adherence to the general themes will be inevitable. It also makes much more sense to have a consistent brand globally with regional nuances rather than regional nuance and a bit of global. That’s just an expensive waste of money (and global branding).
2. Less but more: There will be less institutional research houses but more independents fragmenting the market. So maybe headcount will not drop as much as some of the scare stories. The often talked about “bell-curve”/ “squeezed middle” / “hurt-locker” (whatever you want to call it) will finally start to happen, but will also be aligned to headcount. Research headcount will gather at the core research houses and then spread out across the entrepreneurial independent spectrum. Those in the middle may not produce research, which leads to the question: what will they do to add value?
3. Quality and a little quantity: A focus on quality will always win through; everything else is nice to have. Breadth will be the luxury of the largest who can support the cost and will be linked to existing full-service equities houses. Their brand will focus on convenience.
4. Research as a profit centre (for Brokers): There will be no more opacity to the price / value of research and the potential commission wallet. It will become very clear on what someone is willing to pay for access to the content, so research becomes the revenue producers - not sales.
5. Research as a cost (for fund managers): Research will be a procurement process to be managed. This means once things settle down, it is not likely to increase significantly and will probably be managed downward 5% on an ongoing basis. Unfortunately, it will be managed by someone whose personality is designed to be impervious to relationships.
6. Flexible monetisation: Subscription / pay-as-you-go / widget / retainer / execution, all are feasible ways to be paid. The U.S. might be slightly more complex but making money purely through a bundled execution fee will be one of many avenues to be paid. This is not scary - this is a good thing. It will also significantly improve how a Broker’s cost base is managed and how their return on investment strategy is informed. There will be no more, “Number 5 gets paid $1.5bn so let’s shoot for that”.
7. Barriers to entry: It will be significantly harder to get on a Broker list, but it may become easier to get set up on a subscription list if you already have a brand. The price point will be materially different though. That is not a bad thing (or necessarily permanent) if you start to think about the client journey and align resource to opportunity.
8. More distribution: Content distribution will become important. Someone will need to be focused on making people aware of research and getting clients to engage / read research. This objective generally falls through the cracks because sales are about ‘relationships’ and research is about ‘content’. Hire someone from the FT, eBay or Google and move with the times.
9. Sales becomes client service: Generalist sales as we know it becomes either a cost of sales or redundant. Some may see value in it, but it will not be the function it once was. There will not be the egos there once were either. But, let’s be honest, arranging trips, calls with analysts, sending out content emails are not the work of a six-figure sales person - it is the work of a client service person. Think Prime Brokerage type staff; they don’t make money per se they just facilitate. Unfortunately, or refreshingly, (depending on the view point) it will not be a particularly high paid role.
10. Specialist sales: This is where the premium should be paid. Steady, not paid up, just aligned to how they are accustomed to being paid. Relationships based on solid insight and a deep understanding of a sector will add significant value. These will be the people that can open up relationships and will be as sort after as the best analysts. There will be minimal change to headcount in the short term but there will be less of them in the longer term. Not everyone can claim to be special unfortunately!
11. Execution as a utility: Retail clients can trade for free these days; the next evolution has to be where fund managers are going to look to control their trading costs better. Think of the mobile phone / broadband evolution and unlimited usage ‘within reasonable limits’. It will also see similar consolidation to any other utility industry with another bell curve, with blanket providers at one end and specialists at the other end. Those in the middle may not provide execution, which leads to the question: what will they do to add value?
12. Execution advisory: There are still roles for traders. It will be more consultative than transactional and as such will have value and maybe an incremental price associated with it.
13. Carpet Bombing: I said it before – I cannot understand why there is not more brand building in research. When you have literally hundreds of research providers (maybe thousands depending on how you define an IRP) surely content marketing is a more effective way of helping a broad audience understand what you are good at and what problems you can help solve?
14. Institutionalised FinTech: Disrupters disrupt. They (generally) do not take material market share. The biggest impact they will have will be to evolve the institutionalised business. Consolidating around improving the buy-side and sell-side relationship instead of trying to replace it, will have a bigger impact and be commercially more effective in the short to mid-term. The longer term everything will effectively be FinTech anyway.
15. More discipline – probably stick not carrot: I have an account management background so I tend to be more fascist than laissez-faire. But cash equities is about discipline; it is a simple business made complex by people justifying their compensation or entertaining their own ego. More discipline will be needed going forward. That’s not a case of not giving stuff away to clients, it is just having a commercial business case to justify the investment first. There can be no more systematic ‘throwing stuff at the wall and seeing if it sticks’; it will diminish value and brand. It will also not be possible in Europe on a sustained basis anyway. 

So, in summary… I see a world where those who decide to be in the business are smaller, more streamlined and more disciplined when it comes to running their business.

There will be more levers to pull, but more transparency to better understand the return on investment.

FinTech will be used to enhance the buy-side / sell-side relationship, outsource distribution and trading. Everyone will have a better understanding of, and be able to, identify value through a plethora of analytics.

Contrary to most, I don’t see headcount numbers necessarily needing to change materially. A lot of trading floors are pretty lean these days. The make-up and cost base of those heads changes dramatically though, which is going to be just as painful to many.

Finally, profitability can be achieved without the need to wait for: ECM to pick up, Prime Brokerage to have a bumper year or Japanese volatility to pick up again and for those positions to pay dividends. The traditional excuses will be removed. The profit number may not be massive, but it will wash its face and justify being the ‘relationship’ part of the business.

MiFID II is not a not the real problem within the industry. Yes, it will result in change and maybe less money will be spent; the problems that need to be resolved have been inherent within the industry and glossed over for far longer than this piece of regulation, or indeed any of its previous incarnations, have been relevant.

Equities will be less sexy though (and probably run by accountants). Alas, the Swiss watch industry will be the biggest losers in the end.

Oh, and if you are currently sitting in a brokerage house and it feels like you are in the hurt locker, we have some ideas - which we will share in due course. 

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