Who is the best broker in Israel, what criteria should investors be looking at when choosing a trading desk for their activities, and is there enough competition in this sector? Globes recently conducted its third Israeli Trading Desk Survey, with the participation of 50 financial bodies that manage money and work with the competing trading desks regularly.
So, what do the large Israeli investors think? The survey’s results show that first place is taken by investment firm IBI. 50% of the respondents voted for the veteran brokerage firm as one their three most preferred brokers. This is the third time that IBI, whose brokerage activity is managed by Julien Assous, has gained first place in the Globes survey.
The reasons for choosing IBI given by the survey respondents include the investment bank's initiative and ability to enhance value, its deal flow, and its large volumes of activity, as well as the "professionalism of its traders", "high quality analytics" and "distribution accessibility".
IBI brokerage is held by the IBI investment house (80.1%) and Migdal Capital Markets (19.9%), and this is a result of the merging of IBI's and Migdal Capital Markets' Tel Aviv Stock Exchange (TASE) members, a move that boosted IBI's activity in the field.
In second place, after IBI, and by with only a small margin of votes, is Leader Capital Markets, selected by 48% of respondents. The survey respondents that chose Leader, noted, among other things, that Leader possesses "relevant and high-quality analytics", that it "leads in distribution", and that "it employs professional traders and produces quality research".
Leader, owned by its employees
Leader Capital Markets changed ownership over the past year. Less than one year ago a deal was closed in which a group of employees, headed by then CEO Amit Vardi, purchased control of the brokerage firm from Leader Investments with Tzachi Apeloig at its helm. The deal took place after a complicated period of uncertainty and strained relations between Apeloig and Leader Capital Markets' management. After the deal was completed, a peaceful environment returned to the brokerage firm, which is managed today by Shai Ben Yakar. The cloud of uncertainty has dissipated, and the company is continuing business as usual, without further employee attrition. It seems that evidence of the company having successfully survived the changes is the top ranking it achieved in the survey.
Excellence Brokerage, managed by Elad Banbag’I, is ranked third, and was selected by 44% of the survey participants - who explained that the firm has “a respectable flow of equity deals” and “high level analysis in a number of fields, and professional service”. Fourth spot in the ranking went to the Meitav Dash investment firm, selected by 40% of respondents, whose reasons included the company’s “quality distribution and experience”.
The local banks play a central role in Israel’s brokerage market, and manage most of the local securities trading activity. On the basis of Tel Aviv Stock Exchange data, in 2016 the banks managed roughly 80% of trading volume in stocks, and over 87% of the volume in bonds.
Despite this, they are not ranked at the top of the Globes Survey. The first bank to appear in the rankings is Bank Hapoalim, which achieved fifth place after 29% of the survey participants marked it as one of the top 3 brokers. Survey respondents who ranked Bank Hapoalim’s trading desk as one of the three best noted that, amongst other qualities, the bank enjoys “relative strength in information and research, mostly as concerns foreign securities”, and that they are “reliable and professional”.
Bank Hapoalim’s primary rival, Bank Leumi, is ranked only eighth, with just 13% of participants choosing it. Those that did noted the professionalism and politeness of the employees of the bank’s trading desk. The sixth and seventh places of the trading desk rankings, based on our survey, are occupied by two banks, the First International Bank and Bank of Jerusalem, each of which was chosen by 19% of survey participants. Jerusalem Brokerage, was, originally, Clal Finance’s brokerage arm, until its purchase by the Bank of Jerusalem, nearly 4 years ago. Concerning the Bank of Jerusalem, the respondents said, among other things, that the bank “is equipped with a good research department”, while of the First International Bank they remarked, for instance, that it offers its clients “low fees” and good service.
The gap between the size of the banks’ trading operations and the number of survey votes they garnered is evidently owing to a number of reasons. First, the banks dominate the retail sector. Most small clients execute securities transactions through the bank at which they keep their current accounts, and only a small proportion (mostly large or more professional private customers) open separate accounts with the independent brokers. In addition, most of the institutional investors also work with the banks, because of the deep-seated relationships between the parties, that include, in parallel to the trading activity, operating and distribution services for the institutions’ products. However, when asked in the survey to select their preferred firms, most respondents mentioned the independent firms as more professional. We should mention that the survey was submitted only to institutional or commercial bodies, and did not include the retail sector.
Globes Brokerage Survey
Who operates the best trading desks in Israel?
Percentage of respondents voting for each brokerage.
1 IBI 50%
2 Leader Capital Markets 48%
3 Excellence 44%
4 Meitav Dash 40%
5 Bank Hapoalim 29%
6/7 First International Bank 19%
6/7 Jerusalem Brokerage 19%
8/9 Bank Leumi 13%
8/9 Mizrahi Tefahot 13%
10 Psagot 10%
11/12 Union Bank 8%
11/12 Discount Bank 8%
Rank the most important criteria, in your opinion, in selecting a trading desk.
1 - least important, 10 - most important
Contact person professionalism 8.7
Availability 8.4
Deal flow 7.9
Quality of quotes 7.7
Expertise 7.6
Research 7.4
Fees 7.0
Unsolicited offers (initiative) 6.7
Access to distributions 6.1
Brokerage scope of activity 6.1
Foreign investment 5.5
Suggestion of advanced products 4.1
What is the level of competition in brokerage in Israel?
Percentage of respondents:
Very high 21%
High 44%
Medium 23%
Low 8%
Other 4%
Service more important than price
What are the most important criteria when selecting a trading desk? On the basis of the responses to the survey, it seems that the human element is the most important factor in this area. Most clients are of the opinion that the professionalism of their trading desk contact person is the most significant criterion - it received an average ranking of 8.7 (on a scale of 1 to 10). The second most important factor in selecting a broker, which gained an average ranking of 8.4 among survey respondents, is the contact person’s availability. The next four most important factors received an average ranking between 7 and 8, in the following order: the trading desk’s deal flow placed third, with an average of ranking of 7.9; quality of quotes was fourth in its importance to clients, with an average ranking of 7.7; broker expertise was in fifth place, with an average of 7.6; and after that, the quality of the brokerage firm’s research, with 7.4.
Surprisingly, fee levels, which would seemingly be the dominant factor in selecting a broker, turned out to be less important in the eyes of clients. The fees criterion was ranked fifth in the summation of the survey results, with an average rank of 7. The bottom line is that the survey results show that most brokerage clients are willing to pay more for contact person professionalism and availability at the trading desk with which they do business, and that service is more important, in their eyes, than price.
A small but competitive market
The number of players in the brokerage market has declined over the past few years. Deterioration in profitability and reduction in trading volumes and public offerings at the TASE, caused a situation in which several firms decided to exit the market or to merge with other entities. Of the face of it, in the light of the decrease in the number of brokers in Israel, we should have expected that brokerage customers would feel as though the market was suffering from low levels of competition.
However, on the basis of the survey results, it seems that most of the customers are satisfied with level of competition in the sector. 21% of clients said that the level of competition was “very high”, while an additional 44% marked the level as “high” - so that approximately two-thirds of clients (65%) believe that the Israeli brokerage market is competitive.
23% of respondents said that the level of competition was “medium”, while only 8% responded that the level of competition was “low”. None of the participants in the survey deemed that the market was “void of competition”.
That said, it is worth noting that the survey focused on institutional clients, and not the retail sector. Competition in the retail sector is much lower, for the most part because clients in this sector are not adequately aware of the subject, and mostly, they make do with the brokerage services offered by the bank where they keep their money, and do not conduct their own market studies to evaluate the different firms.
The TASE’s new management, headed by Iti Ben-Zeev, recently presented a strategic plan to revive the stock exchange which should affect the brokerage firms as well. The “carrot” to the brokers side of things is that the exchange intends to boost the levels of activity, from which brokers will also benefit.
On the “stick” side, the TASE would like to add activity by introducing new exchange members, and mostly by innovative technological firms. For instance, it was reported that Webby, which currently operates financial comparison engines, is due to join as an exchange member. The addition of new exchange members is supposed to increase competition, and to pressure the brokers to offer advanced technological services to their clients.
How the survey was conducted
50 Israeli firms participated in the trading desk survey conducted by “Globes”. These included the banks, the insurance companies, investment firms, hedge funds and public companies that manage nostro accounts. Survey participants were asked to report on the 12 Israeli stock exchange members, who manage the main trading desks in the local brokerage market: the investment banks IBI, Leader Capital Markets, Excellence, Meitav Dash and Psagot, and the retail banks, Bank Hapoalim, Leumi, First International, Discount, Miztahi-Tefahot, Jerusalem Brokerage and Union Bank of Israel.
We asked the survey participants to state the top three trading desks in the Israeli market and to explain their choices in a few words. The second question in the survey related to the 12 measures of brokerage activity, including availability to clients, quality of service, quality of quotes (i.e., the best quotes in any given time provided to buyers or sellers), contact person professionalism (to what extent does he or she understand a client’s needs and is able to “tailor” a personalized deal), fee levels, and so on. Those questioned were asked to award each such criterion a grade reflecting its perceived importance in trading activities. The mark was given on a 1 to 10 scale, where 10 was the highest mark.
The third survey question was designed to examine how trading desk clients view the level of competition in the Israeli brokerage market. The respondents were asked to grade the level of competition on a scale of 0 to 4, where four represented “an especially high level of competitiveness” and a zero score indicated a lack of competition. The survey results accounted for the responses of each of the 50 participants in an equal fashion.
“Customers understand that the best product is not necessarily the cheapest one”
“We are happy to continue to lead the institutional brokerage field in Israel” says Julien Assous, CEO of IBI Exchange Services - the brokerage arm of IBI - in response to the firm winning the first place in Globes’s Globes Investments survey. “IBI is the only investment house in Israel for which brokerage is a main area of business, and we continue to invest in it, even during difficult times in the capital markets. We work with almost all of the institutional clients in Israel and with many of the foreign investors who are active in this country. We owe our success to one of the best teams of traders and analysts in the market, and by maintaining ongoing and close contact, both with the institutions, and with stakeholders and companies” adds Assous.
IBI’s brokerage revenue in 2016 totaled 97 million shekels. IBI’s exchange services company, under Assous’s management, employs 90 people in the brokerage area. “If, in the past, IBI was mostly an institutional broker, today we also have extensive retail activity, with over 15,000 private clients, and we aspire to lead this sector as well”, notes Assous. “In terms of TASE trading volumes, our ranking is fourth in stock trading, fifth in derivatives trading, and eighth in bonds. In other words, we have displaced several banks from leading positions in terms of trading volumes”.
Do you sense a revival in trading volumes at the TASE this year, and is it related to the stock exchange reforms?
“After having hit rock bottom in trading volumes, we have seen a certain rise in the past few months, but I am not sure that it is related to the stock exchange reforms. There is a greater number of public offerings on the TASE and the market is beginning to show signs of life. Even so, the market still suffers from “clinical death” on Sundays. We recommended moving the exchanges hours of operation to Mondays through Fridays, but, unfortunately, our recommendation was not adopted as part of the reforms”.
65% of the survey’s respondents think that the level of competition in the local brokerage market is high to very high. What's your view?
"There is competition in the market, but it is mostly between the banks, which are more 'discount brokers.'
“Competition with the banks mostly revolves around fee pricing. Regrettably, there are fewer brokers today in the open market than there were in the past, as a result of various mergers that have taken place. At present, the Israeli brokerage market is controlled by the big banks, alongside five veteran brokers.
"The fact that the banks account for a large part of the brokerage activity is a result of, among other things, the banks having also provided, until fairly recently, operations and custody services. Today, following the Ministry of Finance’s new directives, the banks will need to choose between brokerage activities and operating activities, which will, in fact, allow us to compete with them on the same playing field. It will require the banks to work much harder or to reduce prices”.
In the survey that we conducted, the customers note “deal flow” (quality of deals and purchase recommendations made by the brokers) as a very important criterion in selecting a trading desk, as opposed to fee prices or trading desk volumes of activity. How do you explain this?
"Because the market is suffering from illiquidity at present, deal flow has a greater impact on the market than fees. We can understand from the survey that the level of fees is less important than the quality of execution. Clients give greater weight to quality research and strong 'flow'. IBI’s flow is backed by one of the largest research departments in the market."
“The brokerage market is experiencing an awakening”
Leader Capital Markets, whose trading desk was ranked second in the survey (up from third place in the previous survey conducted in 2013) also welcomed the survey’s results. “We are proud to be, over a period of years and a number of surveys, the leading firm in the institutional brokerage market, both for Israeli and foreign customers,” says Sagie Poznerson, trading desk manager at Leader Capital Markets (LMC). LMC is, today, a private company not traded on the TASE. This is after Leader’s brokerage activity was purchased by Amit Vardi, who managed the company at the time, in October 2016 for NIS 25 million.
The trade desk team comprises 15 traders and five analysts, who are led by the head of the research department, Alon Glazer. Company representatives note that revenue from the brokerage activity come to a few tens of millions of shekels a year.
“The brokerage market has experienced an awakening, as a result of, in our opinion, an increase in the number of players in the market”, says Poznerson. “Trust funds, hedge funds and foreign clients have become more dominant than in the past, offering increased liquidity to the market, especially in second or third tier stocks. In addition, we see a revival of the primary offering market, and in particular, a large number of distributions by major shareholders, and this contributes greatly to the increase in trading volumes and allowed large entities to show interest and to increase their exposure to stocks, which they avoided purchasing in the past owing to low liquidity in the market” he adds.
As for competition with the banks, Poznerson says, “There is no doubt that cancelling the custodian fee (a fee collected from independent brokers alone), allowing trust funds to open clearing accounts with brokers, and the limitations on the scope of activity a bank’s brokerage arm can undertake vis-a-vis an operating company - all of these are just a few things that the regulator can do to increase competition in the market, all to the benefit of the end client, of course. The survey proves that as competition increases, so will the end products improve.”
As for the effect of the stock exchange reforms, he said, “The index reforms being introduced by the exchange are an important step towards increasing volumes, but, in our opinion, the major contribution is in the commitment to the matter displayed by the new TASE management. The focus over the past few years, on regulatory reforms, and the substantial efforts invested in marketing the exchange in Israel and around the world, in addition to the attempts to persuade well-known Israeli companies traded on foreign exchanges to list on the local exchange, will serve to increase the awareness of foreign investors of the Israeli market and will greatly help liquidity and increase local investment activity.”
The rise of Excellence
At Excellence Brokerage, whose trading desk ranked third in the survey (which compares with fifth place in the previous survey and eight in the first survey), the company’s rise in the rankings, the largest jump among the firms ranked at the top, was well-received: “The survey results show that the institutional client knows how to appreciate high quality analysis and the service provided to them” says Elad Banabagi, CEO of Excellence Brokerage. “We set ourselves a target of providing institutional clients with substantial value and we invested significant resources in developing the best analysis department in Israel and a quality trading desk.”
Excellence’s brokerage arm raked in NIS 72 million in 2016, up from NIS 58 million in 2015. At Excellence Brokerage, the growth in revenue is attributed to, among other things, the expansion of the firm's customer service offerings, and to the establishment of two new departments - foreign bonds and foreign stocks. The company, today, employs fifty people.
Banabagi says that early in 2015 Excellence Brokerage signed an exclusive marketing agreement with global research and brokerage firm Sanford Bernstein. “Bernstein provides analysis that has achieved the highest rankings in the world, and this fits well with our strategy of providing value to our institutional clients and to boosting the activity of institutional investors overseas”, he said.
On competition in the brokerage market, Banabagi says, “The only way that brokers that are not banks can compete with the banking system is by giving institutional clients superior service and high quality analysis. Over the past few years we have indeed managed to increase our market share, and have proven that customers understand that the best product is not always the cheapest product.”
Published by Globes [online], Israel business news - www.globes-online.com - on June 25, 2017
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