FIA European Principal Traders Association

Market Structure and Technology – Who Benefits?

1

Brussels, 10th October

Average Institutional Commissions - Europe

High touch (brokerage/ phone) is now less used by institutional traders (only 30%) with an average

fee of 10-15 bps.

No touch (DMA) accounts now for approximately 70% of total value due to reduced fees and fast

connectivity.

Source: IMC estimates

2000 2005 2011

Method of execution % of trades fee (bps) % of trades fee (bps) % of trades fee (bps)

High touch 100 % 25 – 40 70 % 15 – 20 30 - 40 % 10 – 15

No touch (DMA) N.A. 30 % 7 – 8 60 - 70 % 1 - 3

2

Trading Costs according to Oxera Report

Source: Monitoring prices, Costs and volumes of trading and post-trading services by Oxera, May 2011

Reduction in the costs of trading in all major financial centers (weighted average decrease of 21%)

The cost of trading corresponds to the sum of fees charged by:

• Trading platforms

• Central counter-parties (CCP’s) • Central Securities Depositories (CSD’s)

3

Execution Costs for Institutions

4 Sources: ITG global trading cost and YahooFinance

Imp

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tati

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ps)

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US Europe exUK VIX index

Vix in

de

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Opinions from Several Large Institutions

Assets Under Management Opinion

Blackrock $3,350 billion High-frequency traders provide a vital service to all market

participants. (Blackrock research)

Vanguard $1,509 billion I think the lion's share of high frequency works to the

benefit of the marketplace (Gus Sauter)

JP Morgan Asset

Management $1,252 billion

“we think that our ability to trade stocks for clients actually

over the last five years is considerably improved” (Paul Quinsee)

Wellington Management $537 billion

“Explicit and Implicit Costs have Decreased” “We believe that on the whole the liquidity they (HFT) provide is

beneficial to the markets.” (SEC comment letter)

Managed Fund

Association $2,000 billion

Advancements in technology has led to significant strides in

market efficiencies through competition, lower transaction

costs and greater market depth and liquidity (IOSCO

consultation)

5

Deutsche Börse uses XLM to measure the liquidity of assets traded

in the Xetra limit order book on the basis of implicit transaction costs.

The lower the XLM the lower the cost of trading an instrument

measured by market impact.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2004 2005 2006 2007 2008 2009 2010 2011

XL

M (

bp

)

XLM - €25k

DAX XLM (€25,000 Order)

The Xetra Liquidity Measure

0

20

40

60

80

ALV EON BAS DTE SIE DAI SAP BAY

€500k

Oct-01

Aug-11

0

20

40

60

80

100

120

140

ALV EON DTE BAS SIE SAP DAI BAY

€1MN

Oct-01

Aug-11

0

50

100

150

200

250

ALV EON DTE BAS SIE SAP DAI BAY

€2MN

Oct-01

Aug-11

XL

M (

bp

s)

XL

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s)

XL

M (

bp

s)

Execution cost - FTSE

0

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20

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35

40

201120102009200820072006

Execution cost

25k 500k 1M

Execution cost is calculated by using the real effective spread.

(dividing the absolute value of the difference between

execution price and spread mid-point by the stock price.)

Analysis on the FTSE 8 biggest stocks. 𝑅𝑒𝑓𝑓𝑡 = 𝑝𝑡 −𝑝𝑡𝑀𝑝𝑡

Ref

ft (

bp

s)

Ref

ft (

bp

s)

Ref

ft (

bp

s)

Ref

ft (

bp

s)

0

5

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15

20

25

201120102009200820072006

Execution cost

25k 500k 1M

Re

f ft

(b

ps)

Execution cost - CAC

Similar Analysis on the CAC 8 biggest stocks. 𝑅𝑒𝑓𝑓𝑡 = 𝑝𝑡 −𝑝𝑡𝑀𝑝𝑡

Ref

ft (

bp

s)

Tokyo Stock Exchange – Introduction of Arrowhead

Enhanced

Depth After the introduction of Arrowhead, liquidity has increased for almost all stocks

Source: Tokyo Stock Exchange, Inc.; Depth is the total value of orders within 50bps of the BBO (number of orders × price)

Depth: November 2009 versus March 2010; within 50 bps from mid-price

0 2 4 6 8

0 250 500 750+88%

+126%

+62%

+139%

0 50 100 150 200+64%

+51%

0 20 40 60+67%

+72%

M ar.-10 Ask N ov.-09 Ask M ar.-10 B id N ov.-09 B id

Largest Cap (Core 30)

Mid Cap (Mid 400) Small Cap (Small)

Large Cap (Large 70)

(JPY millions)

(JPY millions)

(JPY millions)

(JPY millions)

Ask

Ask Ask

Ask

Bid

Bid Bid

Bid

• Trading value by minutes on 9 Aug, 2011

• This was the first session after the U.S. credit rating downgrade

• Co-located traders, associated with high-frequency trading strategies, have dampened volatility by buying

the non-co-located clients sell orders

Source: Tokyo Stock Exchange

Tokyo Stock Exchange – Volatility spike

Trends by Major Investor Category: Co-Lo/Non-Co-Lo-Net Trading Value by Minute (Ratio for Market Total Trading Value)

*positive means net-buy, negative means net-sell

The Indian ‘Glitch’

11 Source: Bloomberg

FIA EPTA Position on MiFID II

12

The revised regulatory environment should:

• Regulate all direct market participants

• Promote risk management

• Support resilient and safe markets

And preserve the gains that have been made by automation and competition:

• Lower trading costs

• Reduced bid-ask spreads

• Higher liquidity

• Lower barriers to entry/more choice to investors