Asian equity brokers made 13% less last year as commissions contracted and the region experienced a trading slowdown, according research firm Greenwich Associates.
The shrinking commission pot came from a number of factors, including the trend toward increased use of cheaper electronic trading, a global shift from equities to cash and fixed income in a ‘risk-off’ environment, and general declining equity turnover and fewer IPOs in the region.
The firm’s latest survey of Asian equities trading ex-Japan and Australia, provides a snapshot of the landscape in the 12 months to August 2012, but the report stated the decline may have steepened in late Q3, precipitating a potential commission contraction of 20-30% by year’s end.
“Commission contraction is translating into reduced revenues for the many brokers that have entered or expanded their efforts in Asian equity markets over the past decade,” the report read.
Greenwich believes if equity trading volumes continue to decline in Asia, local institutions might be forced to adopt tactics similar to participants in the US and other markets which have similarly experienced multi-year slumps in equity trading volumes.
“The decline of commission currency in these markets has led institutions to slow their adoption of electronic trading and to give their important sell-side relationships a bigger share of their trading business,” read the report.
However, Greenwich anticipates a return to equities in the next couple of years as “bubbles form in other asset classes”.
In 2011, Greenwich estimated the portion of Asian equity trading volume executed through self-directed electronic systems increased to 21% from 16% year-on-year. At the beginning of last year, Asian institutions surveyed by Greenwich expected to execute almost 30% of their trading volume electronically within three years’ time, suggesting the Asian market was ripe for strong electronic trading growth. However, recent survey results show the share of total Asian equity trading volume executed electronically by the typical institution was flat at 21% in the year ending August 2012.
“Despite the lack of movement over the past 12 months, the broad trajectory of this market is unchanged: Over the longer term, Asian institutions will continue shifting trading volumes to electronic platforms and relying much more heavily on algorithmic strategies,” said John Feng, a consultant at Greenwich Associates. “Of course, such a shift will never be a linear progression – especially in a region like Asia, which is composed of many heterogeneous markets that make setting up electronic infrastructure a complicated process.”
The report was based on interviews with 265 Asian equity fund managers and analysts and 114 traders at institutions based in Asia, conducted between July and September last year.
In fixed income, Greenwich believes trading volumes increased 13% in the year ending July 2012. The firm measured a 55% increase in trading volume of G7 government bonds, a 29% increase in domestic currency Asian bonds and a continued growth of trading volumes generated by Asia’s local banks.