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inflection
The point
Jason Rand , global head of electronic trading and distribution at Berenberg , provides a stark warning on the impact of rising market data and technology costs on the buyand sell-side , and argues fees must be more representative of production costs .
Like it or not , we ’ re here together The post-MiFID II era set the stage for a long-term , structural transition , which has thus far been defined by record-setting consolidation and business closures . Over the past two years , more than 25 % of the top 20 European brokerdealers by market share have either merged or exited equities entirely . On the buy-side , 2020 featured the most mergers and acquisitions , ever . With the top 10 asset managers now accounting for 35 % of the $ 90trn market , more deals seem all but imminent .
Just five electronic market makers now account for 85 % of the liquidity provision in Europe . With rising data costs and substantial reductions in profitability , none of us are impervious to change .
The cost dilemma Rising data and technology costs
At present , market participants are dedicating more resources to explicit cost reduction exercises than delivering value to endcustomers . But given the challenge , how can they not ? Fee compression and increasing data and technology costs now significantly outpace the margin for providing core financial and execution services ; it ’ s not a formula for longevity .
A recent survey confirmed that over ‘ 80 % of financial institutions have eliminated or curtailed their investments all in response to excessive market data costs ’.
The knock-on effect is market disintegration through reduced transparency , coverage , and competition - none of which have a history of producing positive outcomes for investors .
The implicit and explicit cost relationship Over the last 10 years , buy-side commissions in the UK have more than halved to lower than 5bps . In that same period cost adjusted slippage has increased by over 30 % despite the European stock spreads decreasing from 18bps to 10bps in that same period . Venue performance data suggests that reducing explicit costs at a venue level can lead to increases in implicit costs ( slippage ), resulting in a negative net effect to investors . When comparing some European exchange-run dark MTFs , which are on average 60 % cheaper than broker-owned MTFs , their markout is approximately seven times higher .
This raises the question , are trading venues inherently toxic ? The answer is more complex .
Quite often , participants within a venue are a larger determinant of toxicity than that venue ’ s mechanisms or logic . Lower cost venues tend to attract participants whose principle strategy is shortterm alpha generation , which can have adverse effects on larger , institutionally sized orders . Additionally , the quality of the technology used to access these venues and the routing biases that determine their market share are all relevant considerations . Measuring alpha as an all-in cost allows us to understand proximate and ultimate causation .
More innovation , more fragmentation Decentralisation of closing auction volumes Over the last five years , European auction volumes have soared , with the FTSE 100 (+ 38 %), CAC40 (+ 42 %) and SMI (+ 80 %) realising the largest relative increases . Born out of necessity to combat monopolistic and premium pricing by exchanges , the decentralisation of closing volumes into alternate
12 // TheTRADE // Spring 2021