The total amount of equity commissions earned by brokers on trades of European equities shrank by 14% last year to $2.21 billion. This shrinking commission pool and the increased concentration of equity trading volumes among lead brokers is increasing revenue pressure on smaller brokers across the UK and Europe.
Coalition Greenwich’s European Equity Trading Trends 2024—Markets Under Pressure documents the contraction of the pool of equity trading commissions earned by brokers on trades of European equities last year and analyses how investors are allocating their wallets of trade flows and commissions.
Jesse Forster, senior analyst at Coalition Greenwich market structure and technology, and author of the report, said: “In both regions, managers are rewarding their top algorithmic broker with a whopping 28–29% of their electronic order flow. Fifty-six percent of algo flow from UK managers and 64% from Continental desks end up with their top three providers.”
Reduced commissions represent a growing challenge for brokers, especially at a time when investors are directing an increasing share of their existing “wallets” to their top brokers, the document finds. The continued transition of trading volumes to electronic execution also seems to be accelerating the concentration trend.
In 2023, UK managers traded 36% of their order flow by notional value via algorithmic strategies, up two percentage points from the previous year with expectations to hit 39% in three years. High-touch sales trading fell three points to 34% and is expected to drop to 29% in three years. While managers on the Continent increased their high-touch usage by three percentage points, they anticipate growth in electronic trading and expect to trade 45% of their flow through algos and only 25% via high-touch in the next three years.
When it comes to directing trade flows to individual brokers, sourcing natural liquidity remained the primary determinant of commission allocation among the UK buy side at 36%. Continental managers placed the greatest emphasis on low-touch capabilities. In picking algorithmic trading providers, asset managers continue to say ease of use, reliability and high-quality support is paramount. “While the speed arms race may be over in the UK, this battle is still being waged across the Continent, with 34% pointing to low latency as a top selection criterion for algorithmic providers,” the report notes.
©Markets Media Europe 2024
