Traders brace for research crackdown as easy money dries up

Sun Aug 10, 2014 10:32am EDT
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By Lionel Laurent

LONDON (Reuters) - 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 scrutiny.

"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 Suisse.   Continued...