Trading and clearing costs have fallen dramatically across Europe since the onset of competition between equity market infrastructure providers, but the continuing decline of order sizes means buy-side firms may have actually experienced a rise in commission payments since 2006.
The findings come in a new study by independent consultancy Oxera prepared on behalf of the European Commission (EC), which uses data from fund managers, brokers, custodians, trading venues and post-trade services providers across 18 European countries to determine how equity market costs have changed for brokers and buy-side clients from 2006 to 2009.
The report found that decreases to the fees charged by trading venues and clearing houses may not actually reduce trading costs for the buy-side because of the trend towards smaller transaction sizes.
“In many instances, trading costs have risen because there are more trades but each is of less value,” Reinder van Dijk, managing consultant, Oxera, and co-author of the report, told theTRADEnews.com. “So even where the fee per trade has fallen, this can be offset by an increase in the number of trades used to transact a given value of securities.”
During the period studied, Oxera found that the average size of an equity trade fell by 60%, from €25,000 in 2006 to €10,000 in 2009. Across Europe's major financial centres, the decline in trade size ranged from 46% to 80%.
“One trade order (as seen from the fund manager's perspective) today requires more trading and post-trade transactions than it did in 2006, potentially increasing investors' cost per value of trade, since trading and clearing and settlement services are generally charged on per-transaction basis,” read the report.
But while the decline in average order sizes has been a noticeable trend across most European nations, the study found that the cost reduction per transaction in markets such as the UK and Switzerland was so considerable that overall costs declined despite an increase in the number of transactions.
Average trading venue costs measured by value of trading fell by 24% in the UK and 27% in Switzerland, but rose by 90% in Italy and 71% in France between 2006 and 2009. In terms of clearing and settlement, the change in the average cost per transaction reduced by 65% and 18% respectively in Switzerland and the UK, while costs rose by 11% in France and decreased by 12% in Italy.
The MiFID effect
Considering broker costs, the report noted that the average charge levied by trading venues to their members for on-order book trading of equities fell by 60%, from €1.18 per order in 2006 to €0.47 in 2009. The period analysed by Oxera saw the enactment of MiFID in late 2007 and the subsequent launch of multilateral trading facilities such as Chi-X Europe, BATS Europe, Turquoise, which offer low-cost alternatives to domestic exchanges.
The report noted that there were significant variations between market centres, with trading costs for UK equity transactions ranging from €0.03 to €0.30 for a typical large broker, but comparison between different countries and trading venues in terms of absolute costs was not possible because of a non-disclosure agreement between Oxera and those that contributed data to the study.
Brokers' post-trade costs also exhibited a general decline across European countries, ranging from a 3% increase to an 85% decrease for equities trades between 2006 and 2009. The combined average reduction of central counterparty (CCP) costs and central securities depository fees across all financial centres analysed was 25%, from €0.48 per trade in 2006 to €0.36 in 2009.
While the three years analysed show a significant reduction in trading and clearing costs, van Dijk notes that the drivers for further decreases are changing.
“We have seen increased trading platform and CCP competition but we have now reached a point where economies of scale have become very important, as evidenced by the recent flurry of exchange mergers,” he said.
Although MiFID resulted in new pan-European CCPs challenging existing clearing houses, the lack of interoperability between them means brokers cannot save costs
by passing all their trades through a preferred single clearing house. Progress on interoperability in Europe has been stifled because of regulatory concern over the potential for concentration of counterparty risk, but CCPs are confident that an agreement is close.
In Europe, BATS Europe and Chi-X Europe, Deutsche Börse and NYSE Euronext and the London Stock Exchange and Canada's TMX Group are pursuing mergers that they claim will reduce trading costs for all market participants.
Despite the net impact of increased trading costs because of falling order sizes, the study noted that commission paid to brokers decreased by 21% to seven basis points per equity trade in 2009, compared with nine bps recorded in 2006. Oxera says this data is confirmed by data from fund managers which shows that commission rates have fallen by 25% during the same period.
But van Dijk cautions that it can be challenging when trying to separate trading and clearing fees from the overall commission payments made to brokers.
“Commission rates charged by brokers just for the activity of trading are difficult to measure as they may include other services in some countries that are difficult to separate out (e.g. research), particularly in countries that do not have commission sharing arrangements,” he said.