European chill

Bonus Time. Fret About MiFID Later, Asia

Beware chill winds from Europe when the great bull market stumbles.
Kiyosha Ota/Bloomberg

It's bad form to bring up unpleasant things during bonus season. That's one of the two reasons the Asian sell-side isn't talking much about MiFID II.

The other is copious liquidity.

Make no mistake. Once the great bull market ends and equity trading volumes recede, the margin compression triggered by the European Union's revised Markets in Financial Instruments Directive will become uncomfortably obvious. The seeds of disruption have been sown. Even single-country brokers in the region -- folks who think Europe's regulatory actions are too remote to breach their moats -- will feel the pain.

The most profound change that went into effect Jan. 3 is the unbundling of research costs from trading commissions. While the jury is out on whether greater transparency will bring long-term benefits to investors, it's the near-term dislocation of the industry that Asia won't escape.

Popularity Contest

Morgan Stanley leads in Asian (ex-Japan/Australia) equity research/advisory impact, as measured by the firm's share of APAC institutional investors' research vote

Source: Greenwich Associates

Note: Shows top five leading brokers cited, including ties. Weighted by commission spend of accounts. Vote share and trading share represent broker's relative importance to the buy-side institutions within the Greenwich Associates universe. Scores are based on the amount of business conducted with each respondent and the size of each responding institution based on commission spend.

When research consumption by keepers of $20 trillion in assets comes out of the buy-side's own pockets, 1  the sell-side can be reasonably certain that pricing of content will be toast. A 32 percent slump in research budgets of continental European fund managers (and a 17 percent drop in U.K. firms' outlays, according to Greenwich Associates) will hit in waves.

This year, the money spent on Asian research will be divided between fewer players. Buyers will be picky about what they read, and which analysts they call for hour-long conversations. To reduce costs as well as complexity, deals are being struck globally. Boutique firms and single-country research outfits in China, India, South Korea, Indonesia or Malaysia will find it hard to make the final cut of a truncated list.

This year's gobblers of market share, however, will also lose out when the tide turns in stock markets. That's because research budgets in 2018 are still referenced to fund managers' own spending with sell-side firms last year, before the MiFID II rules went into effect. Once buyers start swapping notes on what each is paying for the same thing, the bottom could fall out of pricing.

Pure brokerage commissions will also keep shrinking as more risk-taking capital ends up with passive funds, which might even pay investors to keep money with them. To this long-term trend, add the 10 to 15 percent squeeze on fund managers' fees from MiFID II over three years, and trade execution levies can only go south.

Dead Heat

Morgan Stanley and Bank of America were equal first in terms of institutional equity trading in Asia last year

Source: Greenwich Associates

Note: Shows top five leading brokers cited, including ties. Weighted by commission spend of accounts. Vote share and trading share represent broker's relative importance to the buy-side institutions within the Greenwich Associates universe. Scores are based on the amount of business conducted with each respondent and the size of each responding institution based on commission spend. Equity trading encompasses sales trading, execution, portfolio trading and electronic trading.

Gone are the days when a broker could charge a client 1.25 percent for trading Hong Kong equity. The new normal is more like 5 basis points, or 0.05 percent.

But this isn't the time to moan. Daily trading on the Hong Kong stock market has averaged $18 billion so far in 2018. That's 58 percent more than 2017, which itself was a banner year. Ditto for India, where the National Stock Exchange and the Bombay Stock Exchange are together clearing an average of $6.5 billion in daily trades this year -- double the 2016 figure. Even Vietnam's tiny Ho Chi Minh exchange is witnessing twice as much business as the Philippines, a much bigger market by capitalization.

In this frenzy, nobody's going to heed the icy winds blowing from Europe. Besides, there's the glow of a bonus to keep them warm -- until it's spent.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Global buy-side firms that have stated an intention to absorb at least some research costs in their own profit-and-loss account, rather than pass them on to the ultimate investors, include Allianz Global Investors, JPMorgan Asset Management, Vanguard Group Inc., BlackRock Inc., UBS Asset Management, Deutsche Asset Management, Franklin Templeton Investments, Goldman Sachs Asset Management, and Northern Trust. Schroders Plc and Amundi, which were earlier planning to charge clients instead, have also changed their minds. 

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net

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