Market volatility caused by the pandemic is set to increase European equity commissions by 19% from 2019, after five years of decline, according to the latest European Institutional Equity Trading Report published Bloomberg Intelligence (BI). The report is based on data from 87 European institutional equity head, and senior traders.
Equity commissions are anticipated to increase by 8.8% in 2021 to £2.3 billion after climbing 9.2% in 2020. According to the study, a majority (53%) of traders believe that their overall commission payments will rise this year, and more than two-thirds forecast improvements in trading volumes.
The Bloomberg Intelligence report notes that, if predictions come true, 2021 will be the second year in a row to see brokerage commissions improve following a decline of a third in 2015-19. Currently, the average blended commission rate is at 3.46 basis points.
This period saw a shift from active management strategies to more quantitative and passive strategies put pressure on turnover and fees and a switch to less expensive trading channels. Survey respondents view algorithms as the most important broker service, followed by high and low touch services.
Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence said: “Vacillation between euphoria and disappointment has driven equity values and commissions at a time when the pandemic has enabled fundamental management to outperform standard index-based passive measures.
“While the creation of a Covid-19 vaccination arrived faster than many expected, varying country implementation strategies and containment efforts pushed investors to think and rethink their holdings. This in turn pushed up trading volumes, commissions and research spend. This climate aided fundamental and active investors, whereas the added flows paired with working from home pushed traders toward lower priced algorithmic and lower-touch trading channels.”
Sarah Jane Mahmud, Senior Analyst, Financial Regulation, Market Structure & Asset Management at Bloomberg Intelligence commented: “Sweeping pandemic effects on asset classes, industries, sectors and companies have reinforced the importance of active fund management and powered an increase in equity-research spending in Europe. Institutional investors increased their research funding 7.6% to 689 million pounds in 2020 after a decade-low 640 million in 2019.”
The impact of investors rethinking holdings in response to Covid-19 volatility and the resultant increased flows as well as more traders working from home has meant that lower-priced algorithmic and lower-touch trading channels have also benefited.
Tabb also said: “The pandemic has had sweeping impacts on asset classes, industries, sectors, and companies. Some industries like technology have boomed, while others such as travel and leisure have languished. This has reinforced the importance of active management, and has powered an increase in equity research spending.”
Furthermore, the survey finds that 65% of head and senior traders indicated that they expect their 2021 value traded will go up. On the other hand, 28% of traders believed that their commission rates would decline. The average fund paid £1.54 million for research in 2020, with larger funds spending £5.28m and mid- and smaller-sized funds less than £1m.
Figure 1: Institutional European Equity Trading Commissions
Source: Bloomberg Intelligence. European Equity Trading Report, 2021.
The full European Institutional Equity Trading Report is available to Bloomberg Terminal subscribers via {BI<GO>}. BI will publish further findings from the survey over the following days focused on the respondents’ views on commissions and rates; Brexit, MiFID II and regulation; work from home, meme stocks; and brokers and services.
