According to a new industry benchmark research study published today by TABB Group, “European Equity Trading 2008: Liquidity, MiFID and the Brokerage Relationship,” low-touch electronic trading across the European equity markets will account for nearly 2.1 billion euros in commission revenue by 2010, up from 1.8 billion in 2008. Although use of sales traders across European market centres will continue to decline at a rate of nearly 10%, the beliefs that the European sales trader is “passé” is unfounded, says TABB Group, adding that while their role has changed over the past 10 years, it will not disappear.
“New trading venues are beginning to emerge, promising faster executions, lower costs and a variety of different structures,” writes Kevin McPartland, senior analyst at TABB Group and the study’s author. “Crossing networks bring the hope of the block trade. Alternative-displayed markets want to attract electronic liquidity providers to a pan-European trading platform. And over 75% of UK buy-side traders, for example, are connected now to crossing networks with the rest of Europe following a similar path.” However, he adds, if innovation and competition bring new forms of liquidity, it will become inherently harder to find. As new trading venues siphon market share from established exchanges a more fragmented market will be born. “Where all trading was once concentrated at the primary exchange, it will become necessary to examine the new multi-lateral trading facilities (MTFs) to ensure receipt of the best price,” says McPartland.
In the pan-European marketplace, bulge-bracket firms continue to dominate in all areas of equity trading due to their global reach and sophisticated technology that is difficult to duplicate. “The increasingly complex trading landscape, stringent best-execution requirements and volatile markets,” explains McPartland, “make sell-side brokers increasingly important to the buy-side trader. The buy side looks to their broker to provide clarity to the situation. Despite a 9% yearly decline since 2005, the buy side will continue to execute 50% of their order flow through sales traders by 2010, down from 82% in 2005. The sell-side value proposition can come in different packages, whether it is through sales trader-provided colour or liquidity-seeking algorithms, but these are not mutually exclusive. Automated trading does not spell doom for the sales trader, just as the sales trader does not prohibit the growth of electronic trading. Even for electronic-trading clients, the expertise provided by the sell-side broker remains invaluable in navigating the markets and the complexities that surround them.”
On the subject of MiFID, Andy Howieson, TABB Group Europe’s managing director, adds “that as Kevin points out, despite its reach across Europe, slightly more than 50% of the buy-side traders see no current impact from the regulation but for those affected by MiFID, the number one concern focuses on new reporting requirements and other necessary documentation driven primarily by best-execution rules.”
Other key findings from the study include:- Varying slightly by region, approximately 70% of order flow is sent via core brokers, and by 2010 that amount will rise to over 6.1 billion euros in commission dollars spent with core brokers.
- Blended commission rates have plummeted 16% in the past three years, now averaging eight basis points.
- 100% of UK-based asset managers have seen a decrease in market transparency since MiFID took effect.
- The number of Western and Northern European buy-side firms connected to crossing networks will increase, driving a 46% estimated CAGR in executions over the next two years.
This 54-page study with 53 exhibits is based on conversations with 61 buy-side traders from traditional asset management firms dealing in European equities. Traders were located in 18 countries across Europe, segmented into five geographic groups. US-based buy-side firms trading in Europe were not included this year, leaving Continental Europe to account for a greater portion of the sample at 62%. The report covers topics including volatility, new trading venues, algorithmic trading, broker relationships and the impact of MiFID.
The research can be downloaded by TABB Group Research Alliance Equity Service clients and permissioned media at https://www.tabbgroup.com/Login.aspx. To request an executive summary or to purchase the report, please visit http://www.tabbgroup.com or write to info@tabbgroup.com.