LONDON - Trading international stocks through London is expensive, and may have become more so in recent years, according to a new study by Birinyi Associates Inc., Greenwich, Conn.
"The key thing is the cost of doing trades in London ... is extremely high," said Laszlo Birinyi Jr., president of the trading consulting firm bearing his name.
London's dealer-oriented market is much more costly than order-driven markets such as the New York Stock Exchange, the study shows.
Many trades of continental European stocks through the London Stock Exchange's SEAQ International system fall outside of the spread quoted on the local market, the study found.
And, price shifts from trade to trade are much more common than on order-driven systems, the study found.
Added Carole Ryavec, a director of Plexus Group, a trading-cost consultant in Santa Monica, Calif.: "Basically, the U.K. is expensive and people were surprised at how much they pay under almost any (measurement methodology)."
The LSE is "the worst possible combination, a sort of combo between NASDAQ and the old boys' network," Ms. Ryavec added.
Certainly, trading internationally is expensive, according to any market participant.
While the elimination of fixed commissions and lowering of stamp duties in many markets have brought these transaction costs down in recent years, market impact costs - that is, how much the purchase or sale of stock affects the stock's price - remain high, although they are hard to measure and remain hidden to most investors.
Ms. Ryavec estimates that in Germany, commissions average 20 to 25 basis points, with total execution costs three times that level. In France, commissions average about the same, but total transaction costs are about four times that level, she said. (In England, trades are done "net" - that is, any commission is built implicitly into the spread the dealer offers.)
Investors tend to ignore these costs. Investors "place a little too much trust in the local brokers in the markets which have done well and risen strongly," while ignoring costs, Mr. Birinyi said. "If you're making money, you don't pay as much attention" to transaction costs, he added.
Investors do so at their own peril. Transaction costs can eat up alpha, the measure of how much added value is provided by a money manager, Ms. Ryavec noted.
And these costs will continue to become more significant in time, as the volume of U.S. pension fund money in international markets keeps growing. Greenwich Associates, Greenwich, Conn., said in a recent report that U.S. pension funds expect to increase their allocations to international equities to 9.6% by 1996 from 6.4% last year - an increase of $140 billion.
Last year, institutional investors spent $915 million in commission dollars for international trades, a 53.8% increase from $595 million in 1992, Greenwich found. That is partly attributable to an increase of $40 billion in pension money going into international assets, Greenwich said.
Of that commission dollar flow, 16% went for British stocks and 28% for continental European equities.
Many of these continental European trades are executed through the SEAQ International system, a central market for European stocks for institutional investors. Created in 1985, SEAQ has been very successful in garnering business in continental European equities, particularly in block trades. Continental bourses, however, have been updating their systems, and have been winning back some of the trades to the local markets.
But Mr. Birinyi has grave concerns about the costs of trading through London. He finds the size of the spreads for Continental stocks in London alarming compared to spreads for the same stocks in their home market.
Updating a 1990 study conducted by Marcus Pagano and Ailsa Roell for the London School of Economics, Mr. Birinyi found spreads for selected French stocks had widened considerably. On SEAQ, the spread had increased, from 33% to 1,562% more than the previous level. While spreads increased somewhat on the Paris Bourse for most of those stocks, their absolute level was well below that shown by SEAQ.
For example, the spread on SEAQ for BSN shares was 227 basis points - almost 10 times the 23 basis point spread for the same stock traded in Paris, Mr. Birinyi found. Even though transactions typically trade at the midpoint of the spread in London's dealer market vs. either the bid or ask in Paris, the gap still is much broader on SEAQ.
Also, Mr. Birinyi said his research was based on a broader universe than the earlier study.
Mr. Birinyi also found disturbing how much of the trades done through SEAQ were at prices outside of the spread in the home market. He found 10% of the trades done in French stocks and 9% in Italian stocks that were executed on SEAQ were outside of the range of trading for the day in the Paris and Milan exchanges, respectively.
While various trading-cost methodologies are available, Mr. Birinyi prefers to look at how much stock prices move from one trade to the next. He found 72.7% of transactions in Dow Jones industrial stocks experienced no price change, compared with 47.1% on dealer-driven NASDAQ and 27.2% in the United Kingdom.
Looking at the average-weighted price change, he found prices shifted 0.079% for Dow Jones stocks, 0.419% for NASDAQ stocks and 1.221% for U.K. stocks.
SEAQ's success in garnering business, Mr. Birinyi suggested, is not due to market factors.
Rather, a liberal regulatory environment that does not require immediate reporting of trades, less concern that prices will move while a block is being assembled, and, simply, the centralization of the money management and brokerage community in London have spurred SEAQ's success, the report said.
One buy-side trader, who spoke on the condition of not being identified, bore the latter point out. "If you have a problem (with a trade), you can ask the broker to come around or you can meet up for a beer," he said. If the broker is in New York, it's difficult to contend with the problem, he added.
A spokeswoman for the LSE, while not having read through the Birinyi study, observed that investors come to SEAQ for its liquidity and immediacy. She said SEAQ can handle much larger trades more quickly than the local exchanges.
Roger Guy, a fund manager at Gartmore Investment Management PLC, London, said there normally is not a lot of difference in cost between SEAQ and local markets. He said Gartmore tends to use SEAQ when it wants to trade a large volume of stock quickly, or for program trades. Otherwise, the manager tends to go through the local market and do the trade over time.
George Hayter, a consultant to stock exchanges and a former LSE official, added: "London was never the cheapest place to trade. The point about SEAQ International is that it enables you to trade quickly at a large size."
But Mr. Birinyi maintained fairly good liquidity is available in local markets. "When you look at SEAQ, you don't see the trades that aren't done," he added.
