European Equity Trading 2011/2012: Looking for Allies in the Face of Adversity

With shrinking liquidity in volatile markets and fewer commissions available to feed an ever demanding list of brokers, the buy side is about to face further upheaval from yet more regulation. Options within the lit market are limited, so they are turning to their brokers once more to find effective methods of trading and accessing services in challenging conditions.

Based on conversations with 60 European buy-side traders, this 5th version of an annual study covers the impact of an increasing lack of liquidity, volatile trading, and looming regulation of MiFID II on European buy side and sell side equity trading. The buy side is wary of current European markets with fears of information leakage and mistrust in both venues and true market volumes. With less to share round, the buy-side now has to reassess their broker lists and manage relationships more effectively to maintain service levels.

The reign of incumbent algorithmic providers is under threat with participants choosing to switch who receives the majority of their order flow. No longer willing to settle for adequate performance, over half now use execution performance as a benchmark for selecting their provider. Whilst the majority will maintain the same number of providers, the readiness to review performance offers opportunity for brokers to win market share.

In comparison to developments in automated trading, one area that remains lacking is the role of the sales trader. Small and medium-sized firms say they are experiencing the greatest deterioration in service levels as their brokers concentrate their efforts on larger commission payers.

As the global crisis continues, forcing European investors to think differently across different products and service, a renewed interest is developing in emerging markets. Previously heavily correlated to developed European markets, the economies of the Central and Eastern European markets did not recover as well as many other emerging markets after 2008. However with strong prospects, relatively stable public finances and lower debt levels, the CEE markets are now viewed as a more reliable source of alpha.

In these challenging markets, brokers who excel and who add value will dominate. The regulators and politicians have failed to restore confidence. The buy side is looking for allies in the face of adversity; it will be one to watch to see who will rise to meet this challenge in 2012.

European Equity Trading 2011/2012: Looking for Allies in the Face of Adversity

This report is the result of analyzing detailed conversations with 60 European buy-side traders in the autumn of 2011. The report covers a range of high-level topics including MiFID II, the impact of volatility on trading behaviour, and the fate of Broker Crossing Networks, Multi-lateral Trading Facilities and Organized Trading Facilities. In addition, the report looks at the top brokers according to overall and algorithmic commissions and the reasons why the buy side trades with those firms. It also includes the latest trends in order flow allocation to sales traders, program desks, algorithms and crossing networks; commission rates across those channels; the percentage of order flow executed in the dark; and European emerging markets.