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18 January 2013

US and European Equity Markets: The Shifting Sphere of Influence

There is much that is similar between the US and European equity markets, but the paths are now diverging.

Depleted buy-side commission wallets, order allocation, adoption of commission sharing arrangements (CSAs), algo developments, and broker-selection trends point to clear parallels between the US and European equity markets. The evolution of today’s market structure -- and with it, trading behavior -- used to largely follow the jet stream west to east, but wallets and regulation are changing the current, and we will see greater divergence in the next two years.

There is much that is similar between the US and European markets. Demands from the buy side for greater transparency into algorithmic environments, a voice in the creation of new coverage models, natural block-trading products and help navigating the markets all create common ground. But the intensity and consensus of opinion, and the root causes and effects, have a very geographical feel to them. 

The allocation of order flow across high- and low-touch channels in the US is reaching equilibrium, but Europe is still moving toward more electronic trading. Lower volumes have hit both continents hard, but the combination of a European wallet that plummeted 29% in 2012 and the opening door to CSAs will cause those who trade in Europe to choose brokers and products with a different eye.                            

As the markets on both continents continue to evolve, regulation lies at the heart of divergence, and in Europe this will be both at a national and a EU level. Market structure change is on the outer ring of the SEC’s radar, and radical change is unlikely in 2013. In contrast, MiFID II is in the bull’s-eye of regulators and politicians in Europe, and the true shape of it will emerge this year.

[Related:The Year of the Snake: Is Radical Change In Store for the Equity Markets?”]

At the same time, regulatory barriers to CSA usage are crumbling one by one across Europe, which will change the way the buy side pays its way. Together, these changes will create a different dynamic and propel changes faster in the European markets with regard to liquidity formation, what and how the buy side trades, and how it pays for services.

Throughout 2012, TABB Group conducted 177 in-person interviews with US and European asset managers and hedge funds about equity trading in the US and major European markets. TABB Group’s study, “US and European Buy-Side Equity Trading:An Aggregate View,” offers a view of the data, including trends and the outlook, and highlights variations due to market traded, type of firm, geography or size. The full report is available on TABB Group’s research site.

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