Although on the surface things seem relatively placid in the European equity industry, recent regulatory changes by the U.K. Financial Conduct Authority related to corporate access and the proposed “full bundling” model proposed by ESMA could also lead to the most radical change in the business models of European equity brokers in generation.
That’s the view of Greenwich Associates, a market consultancy, who recently released its 2014 “Share and Quality Leaders in European Equity Brokerage.” With these proposed changes to how the buysie pays its commission chits, the report examines whether the European brokerage industry might change even more than how its commissions are paid.
Greenwich noted that such changes by regulators would likely eliminate the commission sharing arrangements now relied on as a primary revenue source by many small research providers and could more broadly upend the business model of full-service brokers.
“If implemented in current form, investors would have three choices,” said Greenwich Associates consultant John Colon. “First, cut a check to research providers and absorb the cost. Two, pay providers and pass along costs to customers.” Or three, stop buying the research altogether.”
Like in the U.S. equity market, research drives the trading bus. Thus, changes to how research are paid for will indeed likely have a profound trading impact.
Impact of Unbundling
Unbundling would have a seismic impact on the industry as a whole, since revenue generation and market share among of European equity brokers is largely determined by the breadth and depth of their research arms. Approximately 60% of all brokerage commissions paid on trades of European equities are used to pay for research and advisory services, meaning that research-related equity commission payments amount to roughly 1.5billion euros annually.
Also, Greenwich announced the leading European equity brokers who command the most market share when it comes to research.. UBS and Morgan Stanley are the two leading providers of European equity research, the firm said. Each firm receives between 8.8% and 8.5% of the internal “research votes” that determine commission allocations among institutional investors.
UBS leads the European equity market in overall trading with a market share of 10.2%.
UBS leads the field in electronic trading, with a market penetration of 63% in algorithmic or smart-order routing trading.
With a market penetration score of 54%, UBS also holds the top spot in portfolio trading.
Lastly, Greenwich announced the year’s quality leaders – firms whose institutional clients award with quality ratings that top those of competitors by a statistically significant margin. The leaders for the year were Exane BNP Paribas and UBS.
When it comes to equity research and advisory services, Exane BNP Paribas, Morgan Stanley and UBS were tops in Europe.
UBS was the leader in overall equity trading while Morgan Stanley and UBS together shared the title of leaders in electronic trading.
