European Equity Trading 2013/14: Part I – Get Set for Innovation

Optimism over the future of Europe has returned, with average daily volumes from our sample set increasing 16% year on year, yet the redefined execution environment will restrain any potential upside from current revenue streams. Commissions from our sample set rose in 2013 after 2012’s dramatic decline but the anticipated increasing use of automation by 96% of market participants will accelerate the need for immediate action on outdated business models. The status quo is finally being overthrown.

The FCA’s intention to create increased transparency of the commission process will intensify the speed and magnitude of industry change with participants’ right across Europe acknowledging the impact. Greater transparency throughout the research process will finally break the relationship between turnover of assets under management and the generation of research, impacting not only the total commissions paid, but fundamentally altering how research is bought, accessed and consumed; redefining the fragile ecosystem between buy and sell side in the process.

For those breathing a sigh of relief that their own regulators are not forcing them to follow suit, while the UK’s FCA is leading the charge, regulators and market participants from around the globe are watching. In addition the shift to automation for the full cycle of the investment process as well as the execution process is not solely dependent on action by any individual regulator: this is the new economic reality for many. The continued concentration of the industry – sell side to buy side to the underlying investments – has focussed on a one size fits all approach which will no longer suffice. A new era of European specialisation is emerging.

Slowing fund flows, reduced commissions, and a persistent shift away from developed markets dramatically changed the rules of engagement for many in 2013 to ensure their survival. Now Pandora’s box has been prised open and a chain of events is unfolding which will ensure the emergence of a new European equity trading model. Change is unavoidable.

A tremendous opportunity now exists within financial services and European dealing desks are now in a unique position. Previous experience from MiFID I will provide the valuable opportunity to capitalise. Trading teams have already been dramatically redefined providing a framework to build a sustainable future for a new era of execution. With research and payment models now set to undergo a similar evolution and across the asset classes, further innovation will emerge which will benefit smaller players as well as those who traditionally have been able to dominate. The challenge for European participants will be to ensure they are able to withstand the turmoil as the industry changes deep-rooted behaviours. The innovation in European equity trading has only just got started.

European Equity Trading 2013/14: Part I – Get Set for Innovation
For this year’s buy-side trading study, TABB Group spoke with 58 head traders of equity management firms across Europe, the UK and US. These firms comprise 49 long-only asset management firms and nine hedge funds, managing €14.6 trillion in assets under management (AUM). The interviews were conducted during Q4 2013. We included in our conversations the cumulative impact of declining volumes and commission wallets; adjustments to order allocation; the value of the high and low-touch trading channels; views on today’s market structure; and block trading and risk requirements and execution developments in Emerging Europe.