Equity Trading's Future in Europe. (Current Research)

By Harle, Philipp; Williams, Mark C. | The McKinsey Quarterly, Summer 2002 | Go to article overview

Equity Trading's Future in Europe. (Current Research)


Harle, Philipp, Williams, Mark C., The McKinsey Quarterly


In Europe, as elsewhere, 2000 was a truly spectacular year for equity trading. In France, Germany, Italy, and the United Kingdom, the industry as a whole made profits of [euro]6.6 billion ($6.02 billion). (1) But 2001 was an equally spectacular bust--industry profits in the four countries fell by more than half (Exhibit 1, on the next page). And the industry's roller-coaster ride isn't over. A new study conducted by McKinsey and J. P. Morgan shows that equity-trading volumes could grow by 8 to 17 percent a year from 2001 to 2005 but that revenues and profits may be more elusive unless wholesale equity brokers adapt their businesses to the changing requirements of their diverse customer segments. (2)

Eckart Windhagen

A rising market and new listings alone will increase overall market turnover by 8 percent annually through 2005. (3) Will it grow faster? That depends on trading velocity: the rate at which investors churn their portfolios. (4)

During the second half of the 1990s, it increased steadily thanks to new trading and order-handling technologies, falling transaction costs, and volatile share prices in a growing market. In 2001, it fortunately stayed flat--if it had dropped as far as market capital did, trading volumes would have fallen much further.

What happens next to trading velocity hangs on changes in demand within market segments and their relative size. Broadly speaking, wholesale brokers serve four customer segments: hedge funds; large active institutional funds and small active institutional funds, both of which pick equities with the aim of outperforming the market average; and passive investment funds (such as index funds), which aim only to mirror the average performance of the equity markets. Although average turnover velocity was approximately 80 percent in 2000 and 2001, the trading velocities of these segments vary a good deal around the mean. A hedge fund, for example, turns over its whole portfolio an average of five times a year, while passive investors typically churn only 15 percent of their holdings annually.

By conservative estimates, overall trading velocity is likely to grow by just 1 percentage point from 2002 to 2005. Although pension funds and insurance companies plan to increase their holdings with high-velocity hedge funds, investment in low-velocity passive funds is also expected to increase substantially, so the velocities of the two will largely cancel each other out. But trading velocity might easily increase faster--more managers of large active funds may make greater use of new systems for handling orders, say. If trading velocity matches its growth rate from 1995 to 2001, total equity market revenues, including those from new capital and new listings, could rise by as much as 17 percent a year until 2005.

In contrast, overall profits are unlikely to rise proportionately. The revenue margins of the trading services offered by brokers differ a good deal (Exhibit 2). While there has been little downward pressure on margins for particular services, investors have shifted a lot of capital to lower-margin ones such as portfolio trades (the simultaneous purchase and sale of a collection of stocks) and bulk trades (which command price discounts) of liquid stocks. This trend, which may well have reduced wholesale-trading margins by as much as 15 percent from 2000 to 2001, is likely to continue as passive or almost-passive investing becomes more popular and trading technology improves (Exhibit 3, on the next page).

How can an individual broker maximize its share of future profits? The outcome depends on how well it adapts its services to the particular needs of each client segment. Most brokers still try to offer the full service: equity research across sectors and countries and the execution of trades in domestic and foreign equities. But not all segments need the whole bundle. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Equity Trading's Future in Europe. (Current Research)
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.