As trading services have increasingly become commoditised, competitive and digitally-enabled, commissions on trading have declined. Indeed, it has become a race to zero.
Trading commissions have been declining across different geographies for a number of years. Equity trading commissions in the United States now average around 2.64 cents per share (cps) for all-in rates and as low as 0.97 cps for algorithmic trades, net of tack-ons for research. In emerging markets, such as China, online trading commissions have dipped as low as two basis points (bps).
Broadly speaking, this decline in commissions has been fuelled and accelerated by technology-led disruptions and structural shifts in the market such as deregulation, low-cost passive fund managers and electronic trading. Meanwhile, the Markets in Financial Instruments Directive II (MiFID II), which is scheduled to come into effect in Europe in January 2017, proposes to unbundle research from trading commissions to protect investors from overspending on research. Once implemented, this directive would further reduce trading commissions and could drive sell-side revenue down by as much as one-third.
This trend of shrinking trading commissions extends beyond equities. Fixed income trading is experiencing similar electronification and technology-led disruption, which is expected to enhance transparency in bond pricing, enhance liquidity, and lower transaction costs.
Together, these market developments have helped lower barriers to entry and level the playing field. The result has been increased competition, the commoditisation of trading services and a relentless march toward zero commission.
Facing shrinking commissions and an increasingly challenging operating environment across the globe, investment banks are trimming their trading activities and re-evaluating their involvement in the brokerage business.
Innovating on the current business model presents a viable way to remain relevant and rise above the race to zero. What's different now are the possibilities afforded by the digital era. Investment banks and brokerages could use digital technology to:
- Appeal to buyer values of convenience, anytime and anywhere. This could be done by fulfilling their investing needs including trading, investing in funds or other asset classes, or investment advisory/management services in one place digitally.
- Drive automation. Robo-advisory has gained considerable attention in recent years for providing investment management services at a fraction of the cost of traditional models. Robo-advisors provide investment management services by using algorithms to make trades and invest on behalf of customers based on their risk appetite, financial goals and investing styles.
- Provide options for investors to interact on their own terms. This means providing the right combination of digital tools and channels to enable self-directed investors, or access to a human financial advisor. Video chat, web chat and e-mail are channels that can be used to deploy high-touch models at lower cost than traditional models.
Sign up for CIO Asia eNewsletters.