Equities trading focus | Outsourcing | Asif Abdullah Feeling the squeeze
Asif Abdullah, lead consultant, GreySpark Partners, explains why managing down the cost-per-trade is key to survival for mid-sized players.
to pre-crisis levels, this has not resulted in an increase in equity brokerage fees. Client trading volumes which drive brokerage commissions continue to remain depressed. Industry research shows that the global equity revenue pool in 2012 was 55% of pre-crisis 2007 levels (see Fig 1) while reduced primary activity, such as IPOs, has curtailed secondary market activity. As a result many firms have
A
been forced to strategically review their equities franchises, which has resulted in the downsizing or shutting down of business lines. The reduced revenue pool has increased competition
100 90 80
70 60 50 40 30 20 10
0 32 2007 2008 2009 2010 2011 2012 Source: Oliver Wyman
lthough leading global equity markets have recovered
amongst brokerage firms. Market-leading equities houses, which have maintained a full service offering, have successfully increased market share at the expense of mid-tier and regional firms. These global firms have maintained profitable business lines by continuing to exploit volume-driven economies of scale and, increasingly, they have benefited from cross-asset flow by implementing multi-asset platforms. Mid-tier or regional firms, on
the other hand, are encumbered by expensive technology and operational platforms designed to manage pre-crisis volumes. What this means is the fully loaded cost per trade for a market leading-firm is
Fig 1: Global equity revenue pools ($bn) 2007-2012
significantly less than for a mid-tier firm. This is illustrated by Fig 2. The ‘Squeeze zone’ is where firms have high cost bases and cannot benefit from economies of scale or scope. For many equities businesses
reduced brokerage revenue coupled with a high cost base has resulted in negative or near negative return on equity, forcing banks to make difficult strategic restructuring decisions. In the context of reduced
profitability, technology platforms need to align to the new business reality. Three key trends in the market are emerging as a response to this: the merging of high-touch and low-touch flows, the commoditisation of trade management functionality,
Fig 2: Cost per trade by service offering
Specialists –
low costs due to specialisation
Source: Greyspark CMI Best Execution | Summer 2013
Squeeze zone – high costs, no competitive edge
Flow leaders – low costs due to scale
Cost per trade
Market share
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