Why the First Logical Step of Global Expansion is More Complicated Than You Think
By Benjamin Arnold and Mary McAvey | Meraki Global Advisors
For most U.S. based hedge funds, Europe feels like the natural first move in a global expansion. The time zone overlap with New York is manageable, English is the working language across most financial centers, and the names on the screen look familiar. That familiarity creates the assumption that trading European equities is a straightforward extension of what you already do domestically.
If only it were that simple. From a market structure perspective, Europe ranks among the most operationally complex trading environments in the world. And the problem is that the costs of not appreciating that complexity do not appear on any commission schedule. Instead, they compound in your execution prices, eroding alpha trade by trade.
The Markets in Financial Instruments Directive (MiFID II) was designed to improve transparency and promote best execution. It succeeded in some respects. It also created significant liquidity fragmentation across the region. European equity trading now takes place across multiple venue types: primary exchanges, multilateral trading facilities (both lit and dark), systematic internalizers, and dark pools, which represented over 8% of European equity volume prior to MiFID II implementation.
For a manager accustomed to consolidated U.S. liquidity across NYSE and Nasdaq, this is a structural change. Every order routing decision carries consequences. So, an order directed to the wrong dark pool can signal your position intentions to sophisticated participants, attract adverse selection, and generate implementation shortfall that you never explicitly see. Managers can experience 20 to 30 basis points of slippage on individual trades without any visibility, because these costs sit inside the price you get at execution rather than showing up as a separate line item.
Brexit compounded the problem. The United Kingdom now operates under an increasingly distinct regulatory framework, with the FCA implementing policies that diverge from EU requirements. A manager trading both UK-listed and EU-listed names must now navigate two separate compliance regimes for what used to be a single regulatory environment. Scandinavian markets maintain their own unique characteristics. Each EU member state still presents specific operational considerations around settlement, tax treaties, and withholding requirements.
The notion of a unified European market has never been further from reality. Our white paper, Going Global: How Asset Managers Can Expand Their Investable Universe, Responsibly, discusses the regulatory landscape and explains what responsible compliance infrastructure looks like across the region.
The real expense of trading European securities poorly is the implicit component that most managers don’t measure, like market impact, timing cost, and the information leakage that comes from routing through venues that don’t protect your order flow.
Empirical research puts total transaction costs, including implicit costs, in the range of 30 to 75 basis points for typical orders, and above 200 to 300 basis points for large or illiquid positions. Research from Plexus Group measured total implementation shortfall at 153 basis points for institutional equity trades in Asia and above 240 basis points for U.S. small-cap stocks. Even at the low end, a 20-basis-point execution shortfall on $200 million in annual turnover represents $400,000 in direct performance drag.
Without independent Transaction Cost Analysis (TCA), there is no way to differentiate between natural liquidity and adverse selection, and no way to hold execution counterparties accountable. The white paper details how TCA transforms execution oversight from estimation to measurement.
Building an internal European trading desk means hiring at least two regional traders for coverage redundancy, licensing jurisdiction-specific market data, standing up MiFID II and III compliance infrastructure, and maintaining IT support during European hours. The total base level fixed cost for full global coverage, including compensation, technology, compliance, and IT, typically runs over $2.0 million annually. That overhead applies regardless of trading volume, directly impacting net returns to limited partners.
An Integrated Trade Management (ITM) model converts that fixed cost into a variable expense tied to actual trading activity. It provides experienced traders who understand European liquidity topology, embedded TCA for continuous execution quality measurement, and a conflict-free agency model where the manager retains full control over broker-dealer relationships and commission allocation. The model scales with the fund: no idle capacity during quiet periods, no scrambling to hire and build infrastructure when opportunity arrives.
Industry adoption reflects the economics. In 2023, 39% of asset managers supplemented internal teams with outsourced trading providers, up from just 5% in 2020.
The complete cost comparison, the five-question pre-expansion due diligence framework, and the detailed analysis of prime broker execution tradeoffs are all in the white paper.
Get the Full Whitepaper
Download Going Global: How Asset Managers Can Expand Their Investable Universe, Responsibly for the complete operational, cost, and governance framework.
