Euro Brokers Set to Feel Pain As Commissions Fall Short
Traders Magazine Online News, August 16, 2011
Like their U.S. counterparts, European broker-dealers are feeling the pain brought by falling commissions, according to a study released today.
The Greenwich Associates Annual European Equity Investors Study found that the equity commission trading pool increased only about half of the expected 11 percent gain that was forecast last year by institutional investors.
The pain for European brokers will be acute as it comes on the heels of significant investments in equity trading and research platforms on the part of many European and foreign banks, the study noted.
Jay Bennett
Despite falling far short of their projections, Greenwich said institutions remained optimistic at the beginning of this year, predicting a 12% increase in the commission pool for 2011-2012.
"Like last year, however, trading activity and commission payments have not met expectations to this point in 2011," the report said.
Although trading has recently not been viewed as the most attractive business for sellside firms, the consistent revenue streams attached to institutional stock trading became a central target for many global banks in the wake of the financial crisis and in the face of increasingly stringent capital reserve requirements.
"Global financial service firms need a strong presence in European equities, not just for the sake of equity revenues and profits in themselves, but also as a means of supporting their broader investment banking franchise across Europe and the world," wrote Greenwich Associates consultant Jay Bennett in the study.
The realities of the European institutional equity business dictate that banks looking to establish themselves as strong players must build capabilities spanning most major European country and sector markets. Between 55 percent and 60 percent of commissions paid by European institutions on equity trades are used to compensate brokers and other providers for research, sales coverage, and other advisory services, including access to corporate management teams.
Greenwich Associates wrote that these findings show brokers looking to build market share must maintain a significant and diversified presence across the region.
Furthermore, Greenwich said the only way for most sellside firms to gain market share is either by capturing trading volume with portfolio trading and electronic trading capabilities or through the commitment of capital. Since new reserve requirements and risk management imperatives are making capital commitment much more expensive, brokers are relying more heavily on electronic and portfolio trading capabilities to boost their share of trading.
The study also noted the outcome of regulatory reform remains a wildcard for European market structure, and that the European equity market is probably big enough to support a group of 10 or so pan-European brokers along with a handful of second-tier aspirants. "The sellside will only be able to maintain its current level of capacity if trading volumes recover to projected levels," Greenwich wrote.
If sellside commission revenues remain below forecast, it is only a matter of time before institutions begin to feel pressure from core providers to consolidate trading volumes or risk reductions in sales coverage, research and other advisory services, Greenwich concluded.
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