This content is from: Portfolio

European Traders Set to Cut Ties With Brokers Due to New Rules

A Greenwich Associates survey found that some traders may cut broker relationships because of more stringent rules under MiFID II.

  • Sheila Dang

European buy-side traders may cut the number of brokers they work with after new rules requiring the unbundling of research and trading fees take effect next year, according to Greenwich Associates.

Twenty-seven percent of 55 traders surveyed by Greenwich from March to April said they expect to cut two to five brokers from their network after the second phase of the Markets in Financial Instruments Directives is implemented in Europe in January, the consulting firm said in a report released Thursday. Eighteen percent said MiFID II will prompt deeper cuts of six or more brokers.

The new regulation is forcing traders to reevaluate how they select individual brokers because they’ll be required to seek the “best” results when executing orders for clients, a higher standard than the “reasonable” steps required under the previous directive. Some brokers may end up on the chopping block as traders consider the speed of their execution and the extent of services provided, according to Richard Johnson, vice president of Greenwich’s market structure and technology practice, and author of the report.

“When it comes to trading, there may have been some brokers who find they were only used for their research side,” Johnson said in a phone interview.

Specialist electronic brokers, which are completely focused on execution and are already unbundled from research fees, have the most to gain from MiFID II, as 37 percent of traders plan to route more business to these brokers, the Greenwich survey found.

“Many specialist electronic brokers have or are developing products to service other functions that will be crucial post-MiFID II, including broker evaluations, commission management and research payments,” Johnson said in the report.

Even with traders anticipating the new regulations, Greenwich found that a significant percentage are still undecided or waiting for further clarity before making changes to their workflow. Over half of traders based in continental Europe are undecided or unclear on what changes should be made, compared to 24 percent of U.K.-based traders.

“This suggests there will be a significant rush to comply or make changes in the second half of 2017,” Johnson said in the report.