Investment banks rewarded by volume surge in European stocks

[PARIS] European stocks have swung this year from a central-bank-fueled rally to a Greece-induced slump and back up. The upshot for investors? A resurgence in volume.

After years of shrinking trades and commissions, stock desks in Europe are finally seeing a pickup. Investment banks including UBS Group AG and Deutsche Bank AG have reported a surge in equity trading revenue in the second quarter. The value of stocks traded jumped 25 per cent to 1.4 trillion euros (S$2.1 trillion) in the first half of 2015, the highest since at least 2009, data from research firm Markit showed.

Volatility and investor interest have led to a recovery in trading, according to Manish Singh of Crossbridge Capital.

"You're seeing much better earnings in Europe, driven by a weak euro and improvements in the economy, so that's brought people to the market," said Mr Singh, who oversees about US$2 billion as Crossbridge's head of investments in London. "In the second quarter, Greece created volatility and that in turn brought in more trades. That you're seeing better volume is the basis for being long European financials."

Unprecedented monetary easing by the European Central Bank first sent the Stoxx Europe 600 Index to its best start of the year since 1998, before concern over Greece leaving the currency union dragged the gauge to its worst quarter in three years. Shares then rebounded when the Mediterranean nation reached a deal with creditors, before giving up half those gains amid fears China's slowdown is deepening.

The swings spell a boon for brokers and investment banks, according to Satnam Sohal, a London-based consultant at Greenwich Associates. In the current earnings season, UBS and Deutsche Bank said quarterly equity trading revenue rose 30 per cent or more, while BNP Paribas SA and Credit Suisse Group AG also reported gains.

"After years of falling commissions, the momentum is turning quite positive for the industry," Mr Sohal said by phone. Trading commissions have climbed 23 per cent in the last year, he said, citing a survey by his firm, which provides market research to financial services. Volume almost doubled to 314 billion euros in exchange-traded funds, Markit data showed.

The surge in ETF trading masks a lack of liquidity in individual European shares, with investors mainly using trading indexes via ETFs or the biggest stocks, according to Michael Woischneck of Lampe Asset Management GmbH.

"While trading has had a good run this year, liquidity has dwindled," said Woischneck, a Dusseldorf-based equity manager, who helps oversee 6.2 billion euros. "Our main concern is market depth. There are certain stocks where liquidity has been concentrated, while broader market liquidity hasn't improved." Volume may also struggle to return to levels seen in 2007, according to Crossbridge's Singh.

New York-based Morgan Stanley was the top equity broker in Europe by turnover, followed by Bank of America, Instinet LLC, UBS and Credit Suisse, according to Markit data.

Flows from investor money also support the boost in volume. The region's equity funds have reeled in about US$80 billion so far this year, while investors in US stocks withdrew US$109 billion, according to a July 30 Bank of America note.

Exchange operators in Europe paint a similar picture. Euronext NV had the best volume since 2010 in the second quarter, while trading on Deutsche Boerse AG's Xetra jumped 45 per cent in the period.

"We've seen healthy sentiment for equities in 2015, underpinned by QE, a weaker euro, cheap energy and strong dividend yields in blue chips," said Euronext London chief executive officer Lee Hodgkinson.

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