I-Bank Research Rebounds


Investment banking research up, regional and indie research down, according to the latest Greenwich U.S. Equities report.  The market share of investment banking research is rebounding after declines in 2009 and 2010.  Overall commissions were down 12% according to Greenwich, but the share of commissions allocated to high touch trades increased to keep the portion allocated to research relatively unscathed.  If commissions continue to decline, pressure will continue on all research providers.

The latest Greenwich study, covering the period from mid-February 2010 to mid-February 2011, incorporates responses from 525 U.S. institutions.  As we have noted in the past, the Greenwich survey universe is skewed toward long-only managers, with less representation from hedge funds.

Greenwich reported U.S. equity commissions declined 12% to $11.6 billion during the period.  The contraction occurred as trading volume on American exchanges declined about 14 percent, according to data compiled by Bloomberg.

The Tabb Group has gloomier numbers, forecasting a 17% decline during calendar year 2011.  Tabb Group’s commission estimates are also lower than Greenwich’s, at $8.37 billion as of the end of 2010.   The Tabb Group predicts commissions will fall to $7.25 billion by year end.  The forecasted 17% decline follows a 21% fall in 2010.

Greenwich said the nine biggest brokers got 68 percent of U.S. equity commissions, up from 65 percent last year, while mid-size and regional brokers got 18 percent. Securities firms that execute orders for institutional clients without engaging in proprietary trading or offering investment banking services (independent research firms with securities licenses) received 13 percent.  That leaves 1% for non-broker dealers (or maybe a rounding error).

Share of U.S. Research Vote – Greenwich Associates

2011 2010 2009 2008
Bulge Bracket 68% 64.1% 68.5% 73.1%
Other Broker/Dealers 31% 32.4% 28.9% 23.9%
Non-Broker Dealers 1% 3.4% 2.7% 2.7%


Commissions paid for research and advisory services, including access to executives at companies, rose to a 10-year high of 59 percent of the total from 53 percent a year earlier, Greenwich said.  The remainder (41 percent) went to paying for trade execution services and capital commitment.  By shifting the allocation, institutions were able to keep the total amount spent on research to about $6.8 billion, down only about 3 percent from the $7 billion spent on sell-side research and services in 2009-2010.

Investors allocated relatively more commissions to management access to compensate for declining commission pools.  Access to management received 21% of commissions, up from 19% the previous year, the Greenwich report said.  Payment for analyst services decreased to 24 percent from 27 percent. The share of U.S. asset managers using so-called client commission arrangements increased to 64 percent from 54 percent the previous year, Greenwich said.

The execution portion of commissions was squeezed hard to free up commissions to pay for research. Electronic trading, including algorithms that break up orders into smaller pieces and dark pools, shrank to 40 percent of the total dollar value of transactions from 45 percent the previous year. Algorithmic trading claimed 19 percent of dollar volume, the same as the prior year. For dark pools, or private venues, the proportion slipped to 8 percent from 10 percent.  This trend illustrates why ITG has invested in Majestic Research and Ross Smith.

The average commission paid to brokers for algorithmic trading was 1.3 cents a share across asset managers, with hedge funds paying 1 cent, Greenwich said. Dark pools charged an average 1.4 cents. For direct market access, in which clients trade on exchanges themselves, brokers charged 1.2 cents on average, the report said.


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