FIA European Principal Traders Association Market Structure and Technology – Who Benefits? 1 Brussels, 10 th October
FIA European Principal Traders Association
Market Structure and Technology – Who Benefits?
1
Brussels, 10th October
Average Institutional Commissions - Europe
High touch (brokerage/ phone) is now less used by institutional traders (only 30%) with an average
fee of 10-15 bps.
No touch (DMA) accounts now for approximately 70% of total value due to reduced fees and fast
connectivity.
Source: IMC estimates
2000 2005 2011
Method of execution % of trades fee (bps) % of trades fee (bps) % of trades fee (bps)
High touch 100 % 25 – 40 70 % 15 – 20 30 - 40 % 10 – 15
No touch (DMA) N.A. 30 % 7 – 8 60 - 70 % 1 - 3
2
Trading Costs according to Oxera Report
Source: Monitoring prices, Costs and volumes of trading and post-trading services by Oxera, May 2011
Reduction in the costs of trading in all major financial centers (weighted average decrease of 21%)
The cost of trading corresponds to the sum of fees charged by:
• Trading platforms
• Central counter-parties (CCP’s) • Central Securities Depositories (CSD’s)
3
Execution Costs for Institutions
4 Sources: ITG global trading cost and YahooFinance
Imp
lem
en
tati
on
sh
ort
fall
(b
ps)
0
10
20
30
40
50
60
70
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
US Europe exUK VIX index
Vix in
de
x
Opinions from Several Large Institutions
Assets Under Management Opinion
Blackrock $3,350 billion High-frequency traders provide a vital service to all market
participants. (Blackrock research)
Vanguard $1,509 billion I think the lion's share of high frequency works to the
benefit of the marketplace (Gus Sauter)
JP Morgan Asset
Management $1,252 billion
“we think that our ability to trade stocks for clients actually
over the last five years is considerably improved” (Paul Quinsee)
Wellington Management $537 billion
“Explicit and Implicit Costs have Decreased” “We believe that on the whole the liquidity they (HFT) provide is
beneficial to the markets.” (SEC comment letter)
Managed Fund
Association $2,000 billion
Advancements in technology has led to significant strides in
market efficiencies through competition, lower transaction
costs and greater market depth and liquidity (IOSCO
consultation)
5
Deutsche Börse uses XLM to measure the liquidity of assets traded
in the Xetra limit order book on the basis of implicit transaction costs.
The lower the XLM the lower the cost of trading an instrument
measured by market impact.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2004 2005 2006 2007 2008 2009 2010 2011
XL
M (
bp
)
XLM - €25k
DAX XLM (€25,000 Order)
The Xetra Liquidity Measure
0
20
40
60
80
ALV EON BAS DTE SIE DAI SAP BAY
€500k
Oct-01
Aug-11
0
20
40
60
80
100
120
140
ALV EON DTE BAS SIE SAP DAI BAY
€1MN
Oct-01
Aug-11
0
50
100
150
200
250
ALV EON DTE BAS SIE SAP DAI BAY
€2MN
Oct-01
Aug-11
XL
M (
bp
s)
XL
M (
bp
s)
XL
M (
bp
s)
Execution cost - FTSE
0
5
10
15
20
25
30
35
40
201120102009200820072006
Execution cost
25k 500k 1M
Execution cost is calculated by using the real effective spread.
(dividing the absolute value of the difference between
execution price and spread mid-point by the stock price.)
Analysis on the FTSE 8 biggest stocks. 𝑅𝑒𝑓𝑓𝑡 = 𝑝𝑡 −𝑝𝑡𝑀𝑝𝑡
Ref
ft (
bp
s)
Ref
ft (
bp
s)
Ref
ft (
bp
s)
Ref
ft (
bp
s)
0
5
10
15
20
25
201120102009200820072006
Execution cost
25k 500k 1M
Re
f ft
(b
ps)
Execution cost - CAC
Similar Analysis on the CAC 8 biggest stocks. 𝑅𝑒𝑓𝑓𝑡 = 𝑝𝑡 −𝑝𝑡𝑀𝑝𝑡
Ref
ft (
bp
s)
Tokyo Stock Exchange – Introduction of Arrowhead
Enhanced
Depth After the introduction of Arrowhead, liquidity has increased for almost all stocks
Source: Tokyo Stock Exchange, Inc.; Depth is the total value of orders within 50bps of the BBO (number of orders × price)
Depth: November 2009 versus March 2010; within 50 bps from mid-price
0 2 4 6 8
0 250 500 750+88%
+126%
+62%
+139%
0 50 100 150 200+64%
+51%
0 20 40 60+67%
+72%
M ar.-10 Ask N ov.-09 Ask M ar.-10 B id N ov.-09 B id
Largest Cap (Core 30)
Mid Cap (Mid 400) Small Cap (Small)
Large Cap (Large 70)
(JPY millions)
(JPY millions)
(JPY millions)
(JPY millions)
Ask
Ask Ask
Ask
Bid
Bid Bid
Bid
• Trading value by minutes on 9 Aug, 2011
• This was the first session after the U.S. credit rating downgrade
• Co-located traders, associated with high-frequency trading strategies, have dampened volatility by buying
the non-co-located clients sell orders
Source: Tokyo Stock Exchange
Tokyo Stock Exchange – Volatility spike
Trends by Major Investor Category: Co-Lo/Non-Co-Lo-Net Trading Value by Minute (Ratio for Market Total Trading Value)
*positive means net-buy, negative means net-sell
The Indian ‘Glitch’
11 Source: Bloomberg
FIA EPTA Position on MiFID II
12
The revised regulatory environment should:
• Regulate all direct market participants
• Promote risk management
• Support resilient and safe markets
And preserve the gains that have been made by automation and competition:
• Lower trading costs
• Reduced bid-ask spreads
• Higher liquidity
• Lower barriers to entry/more choice to investors