Brokers are paying for much of the cost of third-party trading technology used by money managers, increasing revenue pressures on sell-side firms that have already lost revenue because of MiFID II disclosure rules that unbundle research from execution costs, according to an Aite Group report.
"Sell-side commissions are under pressure as rates have dropped precipitously over the past 20 years and overall volumes have not recovered to their 2008 highs, while the fees brokers pay to the buy side's vendors have not adjusted commensurately," said the report. "These fees can make up a significant percentage of the cost brokers incur to trade their clients' orders."
While the European Union's Markets in Financial Instruments Directive II is clear on separating research costs from execution costs, it's less clear whether the rules apply to disclosure of costs for order management systems and other trading technology, said the report, "Order Management Systems in Focus: The Light and Dark Sides of FIX and Client Connectivity."
It's possible the same research disclosure rules eventually could apply to technology costs, which could lead to new or additional costs for money managers to cover the technology costs now handled by brokers "as new standards define global best practices," it said.
The report's author, Spencer Mindlin, capital markets technology analyst at Aite Group, said there are issues with the buy side either being unaware or ignoring who is paying for its OMS software, while money managers complain of broker routing of trades to exchanges potentially based on maker-taker rebates they get in return. Aite Group estimates that brokers paid more than $1.2 billion in 2017 globally to vendors and connectivity providers that deliver the software and solutions to money managers, while exchanges that year paid $3.5 billion to brokers in access fee rebates.
"The buy side has been in a tizzy over the exchange rebates paid to their brokers and the conflicts of interest inherent in broker order-routing decisions," Mr. Mindlin said. "But it stays mum about its own agency problems and turns a deaf ear to their brokers who complain about the fees they must pay to vendors to sponsor the buy side's technology."
Mr. Mindlin said whether the costs of the buy side's technology is paid through commissions or from the asset manager's budget, "the end investor is paying when the fund's performance is impacted by inflated trading commissions to pay the fund's technology bills."