Brokers close ranks despite tougher terrain
With equity trading volumes depressed and broker
commissions continuing to fall, global sell-side execution quality for client
orders has become increasingly competitive and commoditised, says James Noser,
president of trading tools provider Abel Noser Solutions.
Abel Noser Solutions’ 2011 Full Service
Global Brokers’ Trading Performance Study measures and ranks the performance of
the top ten brokers in North America, Europe and Asia. To achieve the ratings,
Abel Noser calculates the difference between the price of a share when the
broker obtains an order and the average price a client receives, and then
compares it against a benchmark representing what the client could have
achieved by using a different broker.
“Comparing the placement cost with the
benchmark can be a useful tool to show institutional investors how well their
broker has executed their trades versus the rest of the market,” says Noser.
“However, what we’ve found is that for full-service brokers, the quality of
execution is so competitive that it’s extremely difficult for them to
differentiate themselves at this level.”
The 2011 study is the fourth annual
analysis of broker performance by Abel Noser Solutions, the technology arm of
the agency broker. To ensure fairness and relevance the benchmark is based on
comparisons between trades in the same names, in the same direction (i.e., buy
or sell), with similar percentages of average daily volume or trade sizes and
similar market momentum and trading conditions. The difference between the
benchmark and the actual trading cost then reveals the slippage incurred by the
broker in executing the trade on behalf of the client.
The global results showed a difference of
just three basis points between the leading and the tenth-rated brokers.
Citibank, the top rated broker, lost to the broker placement strike price by
over 15 basis points, but only lost to the trade-level benchmark by little over
one basis point. By comparison, Credit Suisse, at tenth place, lost 18 basis
points since the placement price but only four versus the object benchmark. Abel
Noser reported that the difference between the first and tenth ranked broker
had widened since 2010, citing lower levels of liquidity and reduced global
“These results suggest execution has become
very commoditised,” says Noser. “If you look at the benchmark as a proxy for
trade difficulty, globally, the expected cost ranges from about 14 basis points
to about 17 basis points – so again, just three basis points separate expected
cost from placement strike. The reality is that trades are being distributed
relatively equally between all these brokers.”
In Europe, the difference between the top
broker (Goldman Sachs) and the tenth (J.P. Morgan) was over five basis points,
while in Asia, the gap was between Macquarie Securities and Credit Suisse was
seven basis points. The top-scoring broker could expect to incur slippage of 14
basis points in North America, 11 basis points in Europe and 18.5 basis points
in Asia. By contrast, the highest rates of slippage reported within the top ten
were 22.5 basis points in North America, 18 basis points in Europe and 30 basis
points in Asia.
While Noser suggests it will generally cost
more to trade in Asia than in Europe, for example, the study and transaction
cost analysis (TCA) services offered by firms such as Abel Noser should enable
asset managers to gain a clearer sense of both the total cost of trading, as
well as the specific execution cost incurred by each broker.
“Investors should measure their own
trading,” he says. “We provide TCA services that offer more in-depth and
interactive analysis that can help improve performance. There is a definite difference in trading results
between investment managers that take a hands-on approach to TCA and those that
leave trades outsourced and unmanaged.”