* UK, EU regulators seek curbs on commission system
* Billions of dollars of annual brokerage fees at stake
* Advocates, regulators argue more transparency is needed
* Costs, volumes, client relationships at risk -traders
By Lionel Laurent
LONDON, Aug 10 Regulatory pressure to undo the
traditional way brokers sell research alongside share dealing is
alarming traders in Europe, who fear a further drop in business
and more cost-cutting in an already tough environment.
At stake is the lucrative but opaque system under which fund
managers pay brokers an all-in commission on every trade,
charged to the fund's clients, which covers not only the
execution of the deal but research and other services.
Total spending is estimated at 2 billion pounds ($3.4
billion) in the UK and about $10 billion in the US.
The asset managers are already reining in spending in the
wake of new UK curbs on charging clients for research sometimes
deemed "questionable" and company visits, traders say. A ban
proposed by European markets watchdog ESMA on charging clients
for research - though not yet final - is also seen eating into
brokers' profits, pushing them to merge or cut costs.
Advocates of new rules say such changes will lead to a
healthier and more transparent financial market, though for the
industry it means another hit to trading profits in a
post-crisis world where bank risk-taking has been curbed and
trading activity has yet to recover fully.
"Brokers have already cut enormously, even the big ones, but
equity markets have been difficult," said Neil Scarth, a
principal at Frost Consulting. "We think that (new) research
budgeting is going to cause them to cut further."
Traders say the bundled commission system helps grease the
wheels of equity trading and allows brokers to be more than just
"dumb pipes" into the stock market, but critics argue that there
is no price transparency for clients and that a culture of
one-payment-fits-all has led to excess spending and little
"In no other industry do you see such a bizarre way of
delivering and paying for a service," said Richard Balarkas,
consultant and former head of electronic trading at Credit
Both brokers and asset managers are likely to be under
pressure to restructure operations or cut costs, analysts and
investors say, as trading houses will find it much harder to
fund large research desks while asset-management firms will
struggle to persuade clients to pay much higher fees.
"The trend is clearly going towards an increasing amount of
research being paid for out of the asset manager's profits,"
said Arnaud Cosserat, fund manager at Comgest in Paris. "For us
it will not dramatically change things as we have developed
in-house research...But those in the middle will be squeezed."
Industry associations are lobbying against the ESMA
proposals and have warned that trading volumes and market
stability are at risk; investment-fund body ICI Global said at a
recent hearing that unbundling would be a "major challenge".
"It is inevitable that there will be a decline in equity
market volumes and a rise in price volatility (if unbundling
goes ahead)," said Robert Buller, a spokesman for Paris-based
broker Kepler Cheuvreux. "Less availability of research will
mean less transparency on the correct pricing of stocks."
Advocates of unbundling argue that fears are overdone,
accusing the brokerage industry of supplying too much research
of too little value that is paid for by the end client.
One assessment from Morgan Stanley analysts is that the
financial sector could cut up to $2 billion of excess costs from
research. "The industry is spending more on research than
investors are willing to pay for," they wrote in a 2014 report.
While detractors say this will unfairly harm coverage of
small companies, some see constant demand for good research.
"Firms will have to make a choice as to whether they are a
pure trading business or whether they are providing research...
This will affect the big investment banks too," said Balarkas.
"But quality ideas in overlooked companies will always be in
Traders worry that traditional relationships built up
between broker and fund manager may fall apart without the
incentive of access to research and other services.
"It's a big preoccupation for us," said a London-based
trader who declined to be named. "If clients have to pay a
cheque to access bank research regardless of how much trading
volume goes to that bank, why will they trade with that bank?"
The head of trading at a global asset manager, who declined
to be named, said he had already begun discussing with one of
his brokers about how unbundling might lower trading business.
For advocates of more transparency, this is an important
step that will in the end benefit the client even if it skims
some of the frothy profit from broker relationships.
"Asset managers are going to have to choose the things they
want and only buy those," said Frost Consulting's Scarth. "It
will take probably some of the excess profitability out of the
(1 US dollar = 0.5951 British pound)
(Reporting by Lionel Laurent; Editing by Toby Chopra)