Asia's buy-side 'paying twice' for high-touch execution
According to a new report by agency broker ITG, buy-side firms choosing high-touch sales trading desks for small- and medium-sized orders experience poorer trading performance than those that opt for low-touch, i.e. algorithmic or direct market access, execution strategies.
In the report, ”Trading Asia Pacific equities: how much do brokerage services really cost you?', the firm analysed more than US$1.3 trillion of Asia Pacific buy-side trades over an 18-month period to investigate the relationship between trading performance and commissions paid.
ITG found that for every US$1 billion traded by a buy-side firm exclusively via high-touch, high commission channels it could expect to pay US$4.6 million more – a combination of higher commission and implementation costs – than if it had taken a more selective approach. But the study reported that high-touch services could still be valuable for orders representing a higher % of average daily volume (ADV), i.e. above 50%.
The research suggests that a buy-side trader can save the most money for the fund by using electronic trading strategies for small orders (less than 15% of ADV), but that low-touch, low commission channels should also be considered for order sizes below 25% of ADV.
“Market participants may well be paying a premium to outsource some of the headache that comes with trading in Asian markets, but they are often paying above and beyond that in performance, without realising it,” said Clare Rowsell, head of client relationship management and marketing, Asia Pacific at ITG. “We would encourage our clients to look at their costs and consider using low-touch channels for liquid smaller orders. Below 25% of ADV there is generally very little added value from sales trading and in fact negative impact on performance.”
The report also calls for unbundling in Asia, to counter insufficient transparency, and suggests that commission-sharing agreements can assist buy-side traders to identify the value of research and the costs of getting a trade done.
Ofir Gefen, author of the report and head of analytic products and research, Asia Pacific, ITG, added that the inflection point at which low-touch execution methods become as or more expensive than high-touch channels, from an implementation cost perspective, varies by market. In Australia and Hong Kong, for example, it occurs around 10-25% ADV, whereas in Japan it is 50-100% ADV.
“The largest divergence in terms of cost is in Australia,” said Gefen. “If you look at 0-1% of ADV, you will see that the low-touch implementation costs are very small – below 5 bps. The high-touch costs are over 25 bps. If you include the commission it becomes even more striking.”
Rowsell suggested the effectiveness of high-touch versus low-touch trading methods often depended on the prevalence of electronic trading in each market, citing Australia and South Korea as more developed than Taiwan. “There's still a very strong bias towards using a sales trading desk in Asia. A significant number of clients are yet to dip their toe into the electronic trading world and manage their trades directly,” she said.