European trading business is evolving in response to three distinct trends: unification, technology and transparency, according to new research from TABB Group. TABB sees European capital markets overtaking those in the United States, eventually.

The study suggests that Europe will become a far more efficient landscape for investors and asset managers than it has in the past. According to Adam Sussman, senior research analyst and the study’s author, “these trends position Europe for rapid growth in electronic trading as we see both direct market access and algorithmic trading flow growing at an approximate compound annual growth rate of 50% through 2009.”

“The three trends will produce a European capital markets that will not only continue to siphon listings, revenue and prestige from the U.S. but will set Europe up to become the leading power in a globally integrated capital market,” says Larry Tabb, founder and CEO at TABB Group. “However, if you’re in the US, don’t pack your bags just yet.”

While European harmonization is moving forward, Europe independence is still strong, says Sussman. “Cultural and geographic differences will not disappear quickly, which is why less than 33% of the buy-side believe that a single market structure will take hold in the next five years. Even after MiFID is adopted into law and implemented across the 30 countries, a grand unification of capital market is not in the cards for at least a few decades.”

Other key findings from the study include: 55% of the buy-side believes MiFID will have a significant impact on how they execute their orders, the greatest change being the fragmentation of liquidity across a host of new venues such as Project Turquoise, Instinet’s Chi-X and Equiduct; by 2009, over 58% of the buy-side will be using algorithms, up from 41% in 2007; and, the percentage of orders routed via FIX is expected to rise to 55% by 2009 with an additional 10% routed via other electronic methods.

The study also notes that blended commission rates have fallen at a 6% compound annual growth rate (CAGR) since 2005 and will continue to fall as the buy-side expects to route 24% of its flow to low-touch channels by 2009; commission sharing agreements (CSAs) have significantly penetrated the UK, adopted by 73% of firms, well ahead of the next largest adopter, Southern Europe, with adoption levels of only 38%; brokerage relationships predicated on the back of CSA adoption will be reduced to continue to concentrate commission dollars among a fewer number of large brokers with local brokers struggling as liquidity is de-partitioned and fragments across new execution venues.

Additionally, it finds that: the crossing networks are the Holy Grail for the buy-side, but with only 34% of the buy-side being connected to a crossing network, and most of that among UK traders, more often than not, the search continues onto other venues; and, partitioning of European equities will slowly come to an end as MiFID and related directives lower barriers to entry across the European Economic Area for the entire financial services industry.

The interview-based study is based on conversations with 70 different buy-side firms trading European equities located in 20 different countries, including the EU-15 and the UK.