European Trading Commissions Projected to Slump, Tabb Group Says

Securities brokers in Europe won increased commissions for executing investors’ equity orders last year following a plunge in 2012, according to Tabb Group LLC. The rebound is projected to be short-lived.

Investors including mutual funds and hedge funds spent 1.09 billion euros ($1.5 billion) on European stock trading in 2013, up 9 percent from 2012, according to a Tabb report. Commissions had dropped 27 percent the year before. The research firm sees the amount falling 7 percent to 1.01 billion euros in 2014.

“Optimism about the future of Europe has returned, with average daily volumes from our sample set increasing 16 percent year on year, yet the changing execution environment will scupper any possible upsurge in revenues from increased activity,” Rebecca Healey, financial-services analyst at Tabb, wrote in the report. “The industry will remain forced to consolidate further to remain economically viable.”

Healey’s report is based on interviews, conducted from September to November, with 58 head traders at asset management firms. Their firms oversaw 14.6 trillion euros in assets worldwide, according to Tabb.

Most banks are losing money trading stocks in Europe when their cost of capital is considered, the top equity derivatives executive at BNP Paribas SA (BNP) said last month. Barclays Plc (BARC), UniCredit SpA (UCG) and Nomura Holdings Inc. (8604) are among banks that have cut their equity businesses in Europe amid declining trading volumes and profitability. Europe’s biggest investment banks’ return on equity has tumbled to between 10 percent and 12 percent on average in the past three years, close to their cost of capital, analysts at Barclays say.

Automated Trading

Commissions are increasingly paying for the automated execution of transactions in Europe, as opposed to human-guided trading. Last year, orders completed by algorithms made up 51 percent of payments, up from 46 percent in 2012, and the amount may rise to 52 percent in 2014, according to Tabb. Traditional human sales traders saw their share of commissions drop to 27 percent in 2013 from 32 percent in 2012, with a projected slump to 25 percent in 2014, Tabb said.

“If sales trading is not a dying art, it is becoming an ever more exclusive one,” Healey wrote in the report. “Currently, the greatest level of change anticipated in 2014 is expected to hit moderate commission payers on the buy side; if they are not receiving sufficient service, they perceive that they may as well trade directly themselves via an algorithm.”

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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