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Trading Commissions:
Rising above the "race to zero"

Challenge 07

Introduction

The commoditization of trading services, fueled by technological advances, market changes and increasing competition, has resulted in a long-term downward trend in trading commissions.

Across all markets, pure trading commissions are racing to zero. Facing shrinking commission revenues and being buffeted by the cyclicality characteristic of the flow-based business, investment banks must evolve their business models to remain relevant and transcend the “race to zero.”

Trading commissions have been declining across different geographies for a number of years. Equity trading commissions in the United States now average around 2.64 cents per share (cps) for all-in rates and as low as 0.97 cps for algorithmic trades, net of tack-ons for research.1 In emerging markets, such as China, online trading commissions have dipped as low as two basis points (bps).

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AVERAGE EQUITIES TRADING COMMISSION IN THE US


EMERGING APPLICATIONS


On average, 41% of Gen D investors are looking for simulations and/or gamification tools from their banks

NUMBER ONE REASON WHY GEN D INVESTORS SWITCH INSTITUTIONS


A PERFECT STORM

Broadly speaking, this decline in commissions has been fueled and accelerated by technology-led disruptions and structural shifts in the market, including regulation. More specifically:

shrinking trading commissions

HIGH-TOUCH EQUITY TRADING COMMISSION RATES IN SELECTED ASIAN MARKETS*

* Includes tack-on rates for research and capital
Sources: Greenwich Associates, Accenture Research

This trend of shrinking trading commissions extends beyond equities. Fixed income trading is experiencing similar electronification and technology-led disruption, which is expected to enhance transparency in bond pricing, enhance liquidity, boost efficiency and lower transaction costs. Coupled with regulatory requirements that make it less attractive for banks to carry the risk of trades on their balance sheets, these structural changes are eroding revenue and returns in a traditionally lucrative market.

Together, these market developments have helped lower barriers to entry, level the playing field and enhance transparency. The result has been increased competition, the commoditization of trading services and a relentless march toward zero commission.

Facing shrinking commissions and an increasingly challenging operating environment across the globe, investment banks are trimming their trading activities or leaving the trading business altogether. For example, 40 investments banks, including Bank of America and Nomura, announced more than 68,000 job cuts in 2012, with equities bearing the brunt, Deutsche Bank announced plans to downsize equities in Latin America in 2014, and Standard Chartered closed the bulk of its global equities business in 2015.3 A similar pattern of consolidation can be observed in fixed income, currencies and commodities (FICC), with a number of major banks—including Deutsche Bank, UBS, Credit Suisse and Barclays—exiting parts of this once-lucrative business.4

While investment banks should continue to optimize their trade execution capabilities and reevaluate their involvement in the brokerage business, innovating on the current business model presents a viable way to remain relevant and rise above the race to zero.

Rise of the Digital Generation

In parallel with these changes in the brokerage environment, a broader shift has been taking place in the behaviors and preferences of retail customers. As the digital revolution sweeps across all aspects of daily life, customers have come to expect “anytime, anywhere” convenience and personalization from the businesses they interact with. An Accenture study on the digital generation (Gen D) dispelled the myth that this generation is mainly made up of young people, pointing to investors of all ages who are demanding more from both traditional and digital options, with the propensity to switch for better experience.5 Gen D cuts across age groups and varies by geography.

They value digital tools as a way to augment traditional investing and view such tools as complements to rather than substitutes for human advisors. Many members of this group—particularly those who identify as millennials or Gen X—are willing to switch providers to gain access to a digital tool, service, channel or application that their current institution is unable to provide. They look to these digital tools to reduce transaction costs and fees, improve access to their advisors and help them make more informed investment decisions. This shift in customer behaviors and preferences, along with digital-driven advancements in technology, creates unique opportunities for innovation.

INSTITUTIONAL CHANGE MOTIVATORS

Source: Accenture Research

Rather than view digital innovations as threats, banks and brokerages should seek to harness these innovations to their advantage to appeal to Gen D buyer values, provide options for customers to interact on their own terms, drive automation and encourage customer stickiness.

EVOLVING THE BUSINESS MODEL

Investment banks and brokerages can redefine their value propositions while still leveraging their existing trade execution capabilities. In the United States, and later in Europe, traditional retail brokerage has evolved from a stock-picking, trading-focused business model into one that is oriented around gathering assets under management (AUM) and providing investment advice.

More importantly, what’s different now are the possibilities afforded by the digital era. The ubiquity of the Internet and advancements in digital technology make it possible to transform business models at lower cost to reach a much wider audience at a much faster pace than ever before. Specifically, investment banks and brokerages could use digital technology to:

HARNESS THE POWER OF DIGITAL

As commissions race to zero, investment banks and brokerages should focus on becoming excellent at what is considered “table stakes” in the trading business—trade execution efficiency. Beyond streamlining costs, investment banks and brokerages should also look to evolve their current business models as a means of realizing new sources of value and profitability. The digital era has not only led to a sea-change in customer expectations, but also brought about technology advancements that innovative banks and brokerages can leverage to redefine their business models at lower cost, faster pace and with a wider reach than was previously possible. Rather than view digital innovations as threats, banks and brokerages should seek to harness these innovations to their advantage to appeal to Gen D buyer values, provide options for customers to interact on their own terms, drive automation and encourage customer stickiness.

While the brevity of this paper would not be sufficient to cover a topic of this scope entirely, it is intended to highlight some considerations for rethinking how investment banks and brokerages can confront the challenges faced in the trading business and, in particular, harness the power of digital to help them evolve with pace and agility.

VIEW ALL TOP 10 CHALLENGES FOR INVESTMENT BANKS 2016



CONTACTS

Siew Lee Chong

SIEW LEE CHONG

Kuala Lumpur

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Tomasz Walkowicz

TOMASZ WALKOWICZ

London

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This content has been prepared by Accenture and is for information purposes. No part of this content may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.