Pension funds and other investors are reaping early benefits from the implementation of MiFID II earlier this year with broker commissions falling significantly in the first three months of 2018, a new report has revealed.
According to financial technology group ITG, broker commission fees in the UK fell by almost 20% over the course of the first quarter of 2018 from 7 basis points to 5.8 basis points. Across Europe (excluding the UK) the report showed that fees dropped from 6.9bps to 5.2bps over the same period.
MiFID II, designed to improve transparency within the financial services industry, was implemented on 3 January this year, leading many to suggest there was a direct correlation between the new rules and the commission fall.
“A fall in execution rates was always likely, but not to this extent,” said Andre Nogueira, director of trading analytics at ITG. “Nearly six months in, a decline of nearly a third in UK commission rates proves that MiFID II is really starting to bite.”
Fees for UK and non-UK European brokers peaked in the third quarter of 2017 at 7.4bps and 7.3bps respectively.
Yet Nogueira said there were other factors beyond regulation that were steering commission fees lower.
“As more and more asset managers move towards using [algorithms] to handle their orders, lower commissions are inevitable,” he said.
Last year, the CFA Institute reported that more than three-quarters of European investment professionals said they were less likely to tap investment banks for research after MiFID II came into effect.
Just under half said they were more likely to improve access to in-house research.
“You shouldn’t lose sight that this is good news for the end investor,” said Gary Baker, managing director of the CFA Institute. “If you go back to the origin of MiFID II – which was to boost transparency and the lot of the end investor – then that is what it is achieving.”
There were also wider structural reasons for the gradual diminution of commission fees over the past few years, including greater use of technology and different ways of conducting research, Baker said.
However, he warned that there might be more turbulence ahead over the next few quarters.
“I don’t think this will be the end of it,” Baker said. “But that doesn’t mean [that fee levels will] continue to fall. We could be looking at the end of a pendulum swing and then it settles back down a bit.”
Note: This article has been updated to correct figures in the second and fifth paragraph that were incorrectly expressed as percentages.