UK Equity Execution Costs Fall Over Three Years
Market users have saved an annual £46m ($57m) between 2012 and 2015 in trading FTSE 100 shares due to the improvement in execution quality according to the Financial Conduct Authority.
Justin Bercich and Matthew Allan, from the UK regulator’s Markets Policy Department, said in a report that new data analysis on trading in FTSE 100 shares suggests some costs on the UK’s equity markets have fallen over the past three years, alongside US and European markets.
Bercich and Allan said they did not explicitly examine the fees paid to brokers and the fees and rebates charged by individual trading venues as these vary significantly according to the customer. Instead they analysed execution quality through studying quoted spreads, the speed and likelihood of execution, market depth and the impact of a trade on market prices.
The study found that execution quality has improved since 2012 on the largest UK equity trading venues – the London Stock Exchange, Bats Europe and Turquoise Plato, the European multilateral trading facility majority owned by the LSE Group in partnership with users.
“Scrutiny of five different metrics – volume, quoted spreads, effective spreads, price impact and quoted depth – paints a broad picture of rising volumes, lower spreads and improved execution quality on the UK’s equity markets over this period,” said the FCA.
The report said that on the LSE, quoted spreads decreased from approximately 9.9 basis points on average in 2012 to 7.9 basis points on average last year and that a larger proportion of trades are now being executed closer to the mid-quote.
The report said: “Using very simplistic assumptions for illustrative purposes, compared with 2012 levels this could translate into current cost savings of as much as £182,000 per trading day. Or £46m per year if replicated each trading day throughout the year, just for trading in FTSE 100 shares on the LSE.”
The decrease in quoted spreads could partly be due to greater competition for order flow and more integrated electronic markets added the FCA.
The regulator compared trading of a large subset of the stocks in the FTSE 100, Euronext 100 and the S&P 500 indices on the New York Stock Exchange and said trends in the UK appear to correspond to similar patterns elsewhere.
These three markets have also recorded a drop in price impact between 2012 to 2015.
“Our analysis does not attempt to establish causation or to draw conclusions as to the drivers behind the improvement in execution quality,” added the report. “But greater competition for order flow – both from the trading venues and market participants – has certainly played a significant role in the changes over the past decade.”
Increased competition and a fall in volatility have also made the trading of exchange-traded funds cheaper in Europe than in the US over the past four quarters according to agency broker ITG. Data from ITG showed that ETFs in the US were generally cheaper to trade in 2014 but costs have been lower in Europe since the third quarter of last year.
Simon Barriball, head of ETP Trading Europe at ITG, told Markets Media that the difference in costs is due to the majority of US ETFs being traded on an exchange while the majority, possibly between 50% and 70%, of European ETFs are traded over-the-counter.
“When volatility is low OTC prices are risk-adjusted,” added Barriball. “The European ETF market has also become more competitive so margins have been squeezed.”
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With Ankit Mittal, Business Change Manager, Global Trading, Schroders