Brokers facing the challenges of reduced trading revenues in European equities and new regulatory initiatives are also under pressure from the continued migration of trading business to lower-margin electronic execution.

Despite a multi-year bull market in European stocks and a pick-up in trading volume in the first half of 2014, the amount of commissions paid by institutional investors to brokers on trades of European equities remains 46% lower than it was at its 2008 peak. In 2014, the overall “commission wallet” used by institutions to pay for sell-side European equity research, advisory and execution services totaled €2.73 billion, according to new report, European Equities Under Attack From All Angles, from Greenwich Associates.

“The 2008 peak in investor commission spending should be viewed as an anomaly rather than a high point to be achieved in the coming years as market volumes and volatility increase,” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates.

Low volumes coupled with a lower cost per trade enabled by e-trading are making it difficult for investors to pay for the research and advisory services they so rely on. Since 2008, buy-side investors have increased their use of electronic trading nearly 94% to 31% of total trading volume. On the sell side, brokers faced with declining revenue streams from cash equities are continually evaluating their service levels to clients and readjusting according to commission tiers.

Regulatory Risks
The increase in e-trading comes as the European Securities and Markets Authority (ESMA), in conjunction with the European Parliament and Council of Ministers, are focusing attention on the European electronic market, and specifically dark pool trading venues. Regulators are hoping to create greater transparency across EU markets and make exchanges the best venue in which to establish stock prices. Many participants in Greenwich Associates research argue such restrictions would reduce market efficiency and ultimately hurt liquidity.

Institutions currently allocate 54% of European equity brokerage commissions or an estimated €1.47 billion to pay for equity research and advisory, sales and corporate access services. The U.K.-based Financial Conduct Authority (FCA) and ESMA have both proposed rules that would require asset managers across Europe to use their own funds to pay for research and advisory services.

“Under such a framework, buy-side investors will need to account for research as part of their P&L directly,” says Greenwich Associates analyst Kevin Kozlowski. “That may lead to a dramatic decrease in the use of sell-side research advisory services, a very important revenue stream for sell-side brokers, if buy-side investors are unable to pass higher costs along through increased fees.”