European institutions expect the proportion of equity trades executed through sell-side sales traders to fall to just over 50% of the total volume within the next three years, according to a study by consulting firm Greenwich Associates.
Institutions currently execute about two-thirds of their equity volume on a ‘high touch’ basis, Greenwich’s 2008 European Equity Investors Research Study found, a fall from the 69% level reported in last year’s survey.
“It is extremely rare to see institutions predicting such a radical change in practice in such a relatively short span of time,” said Greenwich Associates consultant John Colon in a statement.
A substantial amount of the business that European institutions expect to divert from broker sales-traders in the next three years will shift to crossing networks and self-directed electronic trades incorporating algorithmic strategies, according to the study.
Greenwich said algorithmic trading currently accounts for about 7% of European equity trading volume by institutional investors, and crossing networks only 2%. But by 2010, institutions expect to be executing almost 15% through algorithmic trades, and more than 10% through crossing networks and dark pools.
The study also shows that the total amount of commissions collected by brokers on European stock trades slipped by approximately 5% from 2007 to 2008. Greenwich attributes this to declining commission rates rather than declining volumes, and points out that while institutions currently pay an average commission rate of 15 basis points on European high-touch trades, commission rates on electronic trades average just 5 bps.
However, there is heartening news for smaller brokers elsewhere in the study. Greenwich found that although global bulge-bracket firms continue to dominate equity brokerage in Europe – UBS topped the firm’s market share ranking – small and regional brokers are holding their own against the big-hitters. This is despite the growing use of commission-sharing agreements (CSAs), widely thought to consolidate institutions’ trade flows in the hands of large brokers.
According to the study, 48% of participating institutions use commission-sharing arrangements, up just slightly from 46% last year. But the number of firms used for executions has not changed over the past six months.
Greenwich said some influential regional dealers are pushing back against CSAs. “The value they provide to institutions has given them the leverage to insist on getting paid for research and advisory services in trading volume, as opposed to CSA commissions,” said Greenwich Associates consultant Robert Statius-Muller.