According to a recent Greenwich Associates study, the average cost of equity executions in the developed world remained largely unchanged in 2016, whereas ETFs are getting more expensive trade.
US Execution Rates
In a recent report published by Greenwich Associates titled, “Have Emerging Markets Emerged? An In-Depth Look at the Changing Landscape of Global Equity Commission Rates” the financial services consulting firm noted that overall equity commission rates have remained largely unchanged in the developed world.
In the U.S., Greenwich said that buy side firms report an average high-touch bundled execution rate of slightly more than 3.7 cents per share (14 basis points), of which 1.7 cents per share (cps) were for execution and 2 cps were for research. The all-in high-touch rate for CSA trades average 3.8 cps, with 1.7 cps being for execution and 2.1 cps being for research. The all-in execution rate for algorithmic trades averages 2.7 cps, with 1 cps being for execution and 1.7 cps being for research.
ETFs, on the other hand, reportedly traded at a higher rate than single-stock transactions. According to Greenwich, U.S. high-touch and algorithmic execution rates for ETFs were 2.2 cps and 1.2 cps respectively — 30% and 9% higher than their single-stock counterparts.
US buy-side traders reported that high-touch trades requiring capital from the sell-side averaged 4.9 cps — 2.7 cps for execution and 2.2 cps for research. The execution rate is almost 60% higher than the reported U.S. single-stock high-touch execution rate of 1.7 cps.
Non US Execution Rates Remain Steady
Greenwich noted that execution rates in the developed world outside the US were a little higher than US rates, explaining “Although curbed by the higher rates paid in smaller countries such as Israel and much of Southeast Asia, rates in developed markets as a whole average 15.6 bps—a bit higher than the 14.9 bps average in developed Europe.”
When taking into account high-touch, algorithmic and portfolio trades, the all-in average equity execution rate for all developed markets remained relatively unchanged at 10.9 bps.
Contrary to recent trends, we suspect that equity execution rates in the developed markets could very well rise in the future as regulatory pressures force investment banks to scrutinize their costs. A number of banks we have spoken with have noted that research unbundling will force them to reevaluate whether they are under charging their clients for execution – particularly for high touch trades or trades involving capital commitment. Many banks believe that buy-side clients will see higher execution rates as a result.
Of course, the big question post MiFID II is, how will research expenditures change – particularly as they will no longer be tied to trading volume. We suspect that the amount asset managers will pay for sell-side and independent research is likely to drop steadily over the next few years as asset managers get comfortable with the process of budgeting for and paying for the research they truly value in a more rigorous process driven manner.