U.S. Banks Make Hay of European Trading Rules
Goldman Sachs and Morgan Stanley gain from consolidation in equities trading
By Paul J. Davies
No banker likes new regulations, but European investment bank chiefs will feel more aggrieved than normal this year.
The reason? A set of rules for securities trading that came into force in January appears to be handing U.S. banks a big competitive advantage.
Goldman Sachsand Morgan Stanley both highlighted the benefits to their equities trading revenue during third-quarter earnings calls. The cost to European banks will become apparent when they start reporting from Wednesday.
Goldman, Morgan Stanley and JPMorganare the world leaders in trading equities, which has been the bright spot for investment banks this year. The equities business has increasingly become a game where bigger is better: It is highly automated and requires heavy investment in software and algorithms that help investors make their trades faster and at lower costs.
The biggest U.S. players already had an advantage. But the new European rules, known as the second Market in Financial Instruments Directive, or Mifid II, have had the unintended consequence of giving U.S. banks another leg up.
These rules expose the actual fee for making a stock trade because they have forced banks to disaggregate other equity services, such as stock research. Previously all brokerage costs were swept into an ill-defined commission. For equity fund managers, the ever-growing competitive pressure from super-cheap passive funds has made trading costs a big focus.
As the new European rules took effect, many fund managers talked about cutting back on the number of brokers they would use. The latest results suggest they have been following through on this promise. “Mifid II is an important driver of something that’s happening across the system, which is consolidation in the top three scale players,” Goldman Chief Financial Officer Marty Chavez told investors Tuesday. "We’ve seen, especially in Europe but also globally, market share concentrating in the top three.”
Goldman Sachs’ Marty Chavez in 2016. Photo: Simon Dawson/Bloomberg News
Equities trading has been good for U.S. banks this year as bouts of volatility have prompted more buying, selling and hedging activity among clients. Altogether, revenue is up 18% over the first nine months for the big five compared with the same period last year.
U.S. banks were already taking market share in the first half. European banks’ equities revenue was up less than 12% in dollar terms from the first half of 2017, compared with 23% growth for U.S. banks.
Some European players have been doing better than others. Barclays ’sfirst-half equity-trading revenue was up almost 40% year-over-year in dollar terms; BNP Paribasand UBSalso saw strong growth. Deutsche Bankwas the big loser.
New equity sales by companies raising money help to drive other equity trading. In another bad sign for European banks, equity fundraising and related activity was down 51% in the third quarter versus the same period last year in Europe, compared to a 5% rise in the Americas, according to Refinitiv.
It is getting harder to succeed in stock trading for European companies—and regulators really haven’t helped.
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