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For years the steady march of technology made it seem as if equity trading costs could go in only one direction — down. Then there was the great disruption.
The dramatic surge in volatility following the collapse of Lehman Brothers Holdings and the seizing up of financial markets last fall caused a significant uptick in trading costs in the U.S. and many other markets. It turns out that all the algorithms and dark pools in the world are of limited use if buyers and sellers are too scared, or uncertain about the outlook, to actually transact.
The crisis appears to have been an aberration rather than a turning point, though. Market participants haven’t lost faith in the power of technology. Indeed, the competition to develop newer, faster, more discreet means of market access has only intensified over the past year.
(Click on the following titles to view tables showing the leaders in global trading , based on data from the 2009 Elkins/McSherry 47-country universe, along with rankings of individual firms in trading of NYSE and Nasdaq stocks.)
In addition, volatility has fallen substantially over the past six to nine months as equity markets have rallied. The Chicago Board Options Exchange’s volatility index, or VIX, which hit an all-time high of 89.53 in October 2008, averaged 25.49 in the third quarter of 2009, close to its precrisis historical average of 20.3.
The combination of ever more powerful tools and the return of liquidity has been having a beneficial impact on costs in recent months, industry executives say. “Transaction costs have come down in line with volatility,” says Greg Tusar, co-head of electronic trading at Goldman, Sachs & Co. in New York.
That development can only cheer investors. Although stock prices in the U.S. and Europe have recovered by roughly two thirds from their March lows, many investors haven’t fully participated in the rebound. Prices remain well off their 2007 highs, and institutions need to claw back basis points anywhere they can in their bid to recover from the big losses suffered in the bear market.
The impact of these cyclical and secular market forces can be seen in our 13th annual survey of transaction costs, conducted for Institutional Investor by New York–based Elkins/McSherry, a subsidiary of Boston’s State Street Corp. The high volatility that prevailed for much of the past year boosted the average overall cost of equity trading in the U.S. by 10.87 percent for New York Stock Exchange–listed securities in the 12 months ended June 30, compared with the same period a year earlier. For those quoted on the Nasdaq Stock Market, the rise was a more modest 2.63 percent.
Despite the increase in costs, the U.S. remains the cheapest place to trade around the world, according to the survey. At just 15.40 basis points for NYSE stocks and 17.97 basis points for Nasdaq, the U.S. costs handily beat the global average of 41.38 basis points based on the volume-weighted average price, or VWAP, benchmark. The global cost was up from 40.86 basis points a year earlier.
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