ITG's Global Cost Review: Equity Trading Costs Rise in a Period Defined by Volatility
Noteworthy findings from ITG’s Q4 2018 Global Cost Review, based on transaction cost data from more than 180 institutional investors:
Increased equity volatility in the final quarter of 2018 gave rise to the highest trading costs observed in the previous 12 quarters. Annualized volatility of the MSCI World Index, defined as the 60-day standard deviation of returns, began the quarter at 19% and ended at 30%. Global IS costs increased 21% to 40bps, while US equities jumped 24% to 34bps. Trading in all regions became more expensive, with the exceptions of Emerging Europe and Middle East & Africa. Commissions per share decreased slightly in the US and remained flat for the global traded universe.1
- The graph below shows the last 13 quarters of trading costs for global, US, continental Europe and Asia ex Japan. Global IS costs were up 39% from the period low point, and IS costs for the US came in 52% higher than their low in 3Q16. Trading globally and in the US were 17% and 13% below their respective high points in the period.
Cost distributions: How consistent was manager performance?
- With the return volatility, we also see higher dispersion across manager results. Amplified stock price movements resulted in significant deviation from arrival for large numbers of executions. Trades in the top 10%2 added 103bps of IS outperformance while trades in the bottom 10% averaged -126bps of cost. We have observed this level of dispersion only once before in the Global Peer universe (Q1 2016).
- Increasing order size also magnified the disparity between the best and worst performing trades.
Top 10% trades in the 50-100% MDV Category (median daily volume) outperformed similar trades in the 1-5% category by 27%. Bottom 10% of trades performed 215% worse as trade size increased.
- An important observation to note this quarter is that buy decisions vastly outperformed sell decisions globally. This was the case, in varying degrees, for all major regions. The aggregated global cost of buys was the second-lowest since 2014 at -9bps, whereas the aggregated cost of sells was the largest we have seen in five years (greater than -67bps).
Overall cost of trading (other markets)
- Asia Pacific ex Japan IS costs advanced +7%, led by large caps (+16%). Mid-cap trading in the region decreased in cost by 14%. IS costs in Japan increased 20%, with large-cap costs up 36%.
- Europe ex UK costs rose 16%, driven by mid-caps, which became 44% more expensive to trade.
- IS costs in Emerging Asia increased 32%, Emerging Europe was down 50%, and costs in Middle East & Africa decreased 22%.
- Costs in Canada rose 68% overall, with large caps increasing by 59%. UK IS costs rose 36%, with large caps rising 47%.
- Aggregate global commissions remained flat at 4.4bps, in contrast to the 13% decrease from Q1-Q4 2017 (pre-MiFID II) and the -7% for full-year 2018. US and European commissions decreased slightly to 1.7 cps and 4.8bps, respectively. Asia Pacific ex Japan commissions fell 3%, while Emerging Asia commissions remained at 9bps. Emerging Europe commissions rose 6%.
1 US commissions measured in cents per share. Global commissions measured in basis points.
2 Top/bottom 10% trades determined by percentile rank of performance vs. arrival price benchmark within ITG’s Global Peer database of global trading activity.