Decline Pressures Brokers and Institutional Investors Alike E-Trading Expansion Hits Temporary Pause
A trading slowdown contributed to a 13% contraction in the amount of commissions earned by brokers on trades of Asian equities (ex Japan/Australia) in the 12 months ending August 2012, according to the results of Greenwich Associates’ most recent Asian Equity Investors Study. Market participants tell Greenwich Associates that the decline steepened in late Q3, precipitating a potential commission contraction of 20-30% by year’s end.
Causes of shrinking commissions for brokers include declining equity turnover, a slowdown in IPOs across the region, the long-term trend toward increased use of cheaper electronic trading, and the global shift from equities to cash and fixed income in a “risk-off” environment.
Commission contraction is translating into reduced revenues for the many brokers that have entered or expanded their efforts in Asian equity markets over the past decade.
According to Greenwich Associates, Asian brokers and institutional investors alike should look closely at the experiences of market participants in the United States and other markets that have been mired in multi-year slumps in equity trading volumes. The decline of commission currency in these markets has led institutions to slow their adoption of electronic trading and to give their important sell-side relationships a bigger share of their trading business.
If equity trading volumes continue to decline in Asia, institutions here might be forced to adopt similar tactics. Fortunately, Greenwich Associates and many major market participants foresee a likely shift toward equities in 2013-2014 as bubbles form in other asset classes which, if materialized, would put market returns and the commission pool back on the path to growth.
E-Trading Growth Trend Intact Despite Flat Year
From 2010 to 2011, the share of Asian equity trading volume executed through self-directed electronic systems increased to 21% from 16%. At the start of 2012, Asian institutions predicted that they would be executing nearly 30% of their trading volume electronically within three years’ time. Those results seemed to suggest that the Asian market was in store for continued, strong growth in electronic trading.
Actual results show the share of total Asian equity trading volume executed electronically by the typical institution was flat at 21% in the year ending August 2012.
“Despite the lack of movement over the past 12 months, the broad trajectory of this market is unchanged: Over the longer term, Asian institutions will continue shifting trading volumes to electronic platforms and relying much more heavily on algorithmic strategies,” says Greenwich Associates consultant John Feng. “Of course, such a shift will never be a linear progression — especially in a region like Asia, which is composed of many heterogeneous markets that make setting up electronic infrastructure a complicated process.”