Neutral Trade Execution Model Under Siege?

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Consolidation among agency brokers poses a potential threat to the independent model for trade execution services.

The path being charted for industry pioneer Instinet by its new owner, Nomura, may be a straw in the wind, according to Financial News. Four months after completing the $1.2 billion purchase, Nomura is moving to integrate the equity-focused institutional trading network with the Japanese firm's broker-dealer operation.

Last week, Nomura replaced Instinet's two co-CEOs and chairman with its own management team. The shift "is expected to better marry Instinet's equities execution tools with Nomura's research and derivatives trading capabilities," Financial News says.

Looking at the broader implications, the newspaper says: "Agency brokers have traded on their independence from the sellside, their direct market access technology and their algorithmic prowess to gain trading volume from the buyside...

"With a merger-hungry financial services market, the so-called 'unconflicted' agency model may have seen better days."

For its part, Instinet says Nomura recognizes the value of the agency model and is committed to retaining it.

Industry consultant Sang Lee told Financial News "there is a certain chance" that the remaining independent agency brokers will be acquired by large broker-dealers, although it's not inevitable.

Other independent execution platforms include the publicly held Investment Technology Group; NeoNet, a direct market access trading group active in 20 countries; and EdgeTrade, a U.S.-focused agency brokerage and technology provider.

Executives at NeoNet and EdgeTrade voiced confidence that hedge funds that account for the bulk of trading activity will favor neutral execution firms that can keep their trading intentions from leaking out to broker-dealers who can then front-run them. Independent institutional brokers also are sharpening their competitive edge by adding capabilities such as dark pools, smart order routing and algorithmic trading.

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