MiFID II provisions could increase trade execution costs in cash equity trading and reduce market liquidity, particularly in small cap stocks, according to European buy-side traders and portfolio managers.
A new report from Greenwich Associates, called European Equity Trading and the Consequences of Regulation, shows that the more than EUR 3.4 billion in commission payments earned by brokerage firms on institutional trades of European equities in the year ending Q2 2015 was about evenly divided. Some 53 percent paid for research and advisory services and 47 percent took the form of payments for trade execution services.
MiFID II will force greater clarity in how research is being valued and impose new structures on how investors pay for it, but it will also bring greater clarity to the profitability of individual trading relationships between investors and brokers.
“In a more unbundled world, it will become difficult for one to subsidize the other,” says John Colon, Greenwich Associates Consultant and author of the new report. The cost of execution could go up to the extent the real cost of liquidity has been hidden in the bundled model, he adds.