ITG 1Q18 Global Cost Review: The Impact of MiFID II
Noteworthy findings from ITG’s Q1 2018 Global Cost Review, based on transaction cost data from more than 180 institutional investors:
European Commission Shift
Beginning in January 2018, the unbundling rules of MiFID II required investors to pay execution-only rates for trading and make separate payments for investment research.
As a result, U.K. commissions dropped from 7.0 bps in Q4 2017 to 5.8 bps in Q1 2018 (8.0 bps in Q1 2017). Europe excluding U.K. commissions dropped from 6.9 bps in Q4 2017 to 5.2 bps in Q1 2018 (7.4 bps in Q1 2017). These findings do not necessarily reflect a drop in the average commissions paid solely to execute trades. Rather, the declines in 1Q 2018 average commission rates are largely due to unbundling, and the rates do not include any separate payments made for investment research or other services, which are not captured in our data.
Increased volatility drove higher implementation shortfall (IS) costs for several countries:
- U.S. costs were the highest IS costs since Q4 2016, averaging 29.6 bps. The rise was driven by a 36% increase in mid-cap costs, from 40.7 bps in Q4 2017 to 55.5 bps in Q1 2018.
- Overall U.K. costs were flat to last quarter, however mid-cap costs jumped to 100 bps (a 41% increase over Q4 2017).
- ITG did a deeper dive into how people trade in low versus high volatility conditions in the recent paper ‘Running with the Level: Volatility, VWAP and Pitfalls of Strategy Selection’, and found that many employ the same trading strategy in different market conditions. In particular, VWAP usage was flat between the Oct 2017 and Feb 2018 while cost increased by 2x against a VWAP benchmark, and by nearly 3X against an IS benchmark.