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(Bloomberg) -- Europe’s sweeping MiFID II rules will make it even harder for investment banks to make money from trading stocks, a business where few banks are currently breaking even, UBS Group AG’s Andrea Orcel said.
Targeting everything from how lenders charge for research to how they execute trades, the rules will make banks look at costs and put pressure on fees, the head of UBS’s investment bank said Tuesday at a Financial News event in London. This will make it even tougher to make money from trading equities and create more concentration in the industry, he said.
“If you think about cash equities, people say the top five clearly break even and everyone else doesn’t,” Orcel said. “I actually think it’s inside the top five, the top five doesn’t break even. Now you look at this environment. You’ve just moved the bar up.”
The world’s biggest banks and asset managers are rushing to comply with the overhaul of financial services rules before it kicks in next year. The regulations will add to the challenges that lenders already face from making money in equities as volatility in markets hovers around record lows and clients make fewer trades.
“MiFID will change the way we do business, it will change competitive positions,” Orcel said. “It will create a lot of adjustment before it lands.”
Cash equities is the trading of actual stocks for clients, unlike riskier, more lucrative equities businesses including equity derivatives and prime brokerage services. The world’s biggest banks produced $4.7 billion of revenue from the business in the first half of 2017, an 8 percent decline from a year earlier and the lowest since at least 2012, according to data from Coalition Development Ltd.
Kian Abouhossein, an analyst in London with JPMorgan Chase & Co., estimates that third-quarter equities revenue for some of the world’s biggest banks will be flat compared with the same period last year, according to a Sept. 15 note. UBS, the biggest stock brokerage in Asia, may increase revenue from the business 2 percent to $830 million, he wrote.
MiFID will force lenders to charge for research, breaking apart a decades-old business model of giving away analysis for free and making banks and money managers price analysis previously bundled with other services. This will lead to a winner-take-all scenario with the most reputable firms grabbing the biggest share of the market, Orcel said.
“This is a model that has remained interlocked and integrated for decades and now you’re blowing it apart,” said Orcel. “Anything that’s not differentiated, that is not high value adding, etc., is actually going to get crushed.”
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