There is change a foot in traditional-bound Europe.
Driven by three distinct trends unification, technology and transparency Europe will create a far more efficient landscape for investors and asset managers than it has in the past, says TABB Group in its new industry benchmark study “Institutional Equity Trading in Europe 2007: The Buy-side Perspective.”
According to Adam Sussman, senior research analyst and the study’s author, “these trends position Europe for rapid growth in electronic trading as we see both direct market access and algorithmic trading flow growing at an approximate compound annual growth rate of 50 percent through 2009.”
While European harmonization is moving forward, Europe independence is still strong, Sussman says.
“Cultural and geographic differences will not disappear quickly, which is why less than 33 percent of the buy-side believe that a single market structure will take hold in the next five years,” he says.
Even after MiFID is adopted into law and implemented across the 30 countries, a grand unification of capital market is not in the cards for at least a few decades.”
Key findings from the study include:
Fifty-five percent of the buy-side believes MiFID will have a significant impact on how they execute their orders, the greatest change being the fragmentation of liquidity across a host of new venues such as Project Turquoise, Instinet’s Chi-X and Equiduct.
By 2009, over 58 percent of the buy-side will be using algorithms, up from 41 percent in 2007.
The percentage of orders routed via FIX rose from 39 percent to 44 percent over the last two years, rising to 55 percent by 2009 with an additional 10 percent routed via other electronic methods.
Blended commission rates have fallen at a 6 percent Compound Annual Growth Rate (CAGR) since 2005 and will continue to fall as the buy-side expects to route 24 percent of its flow to low-touch channels by 2009.
Commission Sharing Agreements (CSAs) have significantly penetrated the UK, adopted by 73 percent of firms there, with the next largest adopter being Southern Europe with adoption levels of only 38 percent.
Brokerage relationships predicated on the back of CSA adoption will be reduced to continue to concentrate commission dollars among a fewer number of large brokers with local brokers struggling as liquidity is de-partitioned and fragments across new execution venues.
The crossing networks are the Holy Grail for the buy-side but with only 34 percent of the buy-side being connected to a crossing network, and most of that among UK traders. More often than not, the search continues onto other venues.
Partitioning of European equities will slowly come to an end as MiFID and related directives lower barriers to entry across the European Economic Area (EEA) for the entire financial services industry.
“The three trends will produce a European capital markets that will not only continue to siphon listings, revenue and prestige from the US but will set Europe up to become the leading power in a globally integrated capital market,” says Larry Tabb, founder and CEO at TABB Group. “However, if you’re in the US, don’t pack your bags just yet.”