Low-touch electronic trading across European equity markets will account for nearly EUR2.1bn in commission revenue by 2010, up from 1.8bn in 2008, according to European Equity Trading 2008: Liquidity, MiFID and the Brokerage Relationship, a study published by the Tabb Group.
Although use of sales traders across European market centres will continue to decline at a rate of nearly 10 per cent, the report says the belief that the European sales trader is outmoded is unfounded, noting 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,' says Kevin McPartland, a 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 more than 75 per cent 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 to ensure receipt of the best price,' McPartland says.
The study is based on conversations with 61 buy-side traders in 18 countries from traditional asset management firms dealing in European equities, nearly two-thirds of them in continental Europe.
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 make sell-side brokers increasingly important to the buy-side trader,' McPartland says.
'The buy side looks to their broker to provide clarity to the situation. Despite a 9 per cent yearly decline since 2005, the buy side will continue to execute 50 per cent of their order flow through sales traders by 2010, down from 82 per cent 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.'
Referring to the European Union's Markets in Financial Instruments Directive, Tabb Group Europe managing director Andy Howieson adds: 'Despite its reach across Europe, slightly more than 50 per cent of buy-side traders see no current impact from the regulation. But for those affected by MiFID, the primary focuses is on new reporting requirements and other necessary documentation driven primarily by best-execution rules.'
The study also finds that with slight variations by region, around 70 per cent of order flow is sent via core brokers, an amount that by 2010 will represent more than EUR6.1bn in commission spent with core brokers. Blended commission rates have plummeted 16 per cent in the past three years and now average eight basis points.
All UK-based asset managers surveyed say they have seen a decrease in market transparency since MiFID took effect. The survey also found that the number of Western and Northern European buy-side firms connected to crossing networks is set increase, driving an estimated 46 per cent estimated compound growth in executions over the next two years.
Founded in 2003 and based in New York and London, Tabb Group uses an interview-based research methodology developed by founder Larry Tabb to analyse and quantify the investing value chain linking the fiduciary, investment manager, broker, exchange and custodian.