TABB Predicts Uptick in U.S. Equity Commissions


TABB Group, a consultancy focused on financial services, predicts U.S. equity commissions will rebound in 2013.  The outlook is not as sanguine in Europe, where pressures on cash equities remain high.

TABB’s report “U.S. Equities Market: 2013 State of the Industry” forecasts equity commissions will increase by $1 billion from $12.7 billion in 2012, an increase of around 8%.  This would be a big improvement over 2012, which TABB estimates declined 8% from 2011.  Nevertheless, commissions are still down dramatically from TABB’s estimated peak of $17.3 billion in commissions in 2009.

Trading volume will increase this year because stocks are likely to have better returns than bonds, the U.S. economy has stabilized and lawmakers have avoided the so-called fiscal cliff, according to the report.  U.S. stock-trading volumes finished last year at their lowest average daily level since 2007, according to figures compiled by Thomson Reuters.


The outlook for Europe is not as positive.  European volumes have halved since mid-2008 and the number of core brokers has remained largely the same, according to TABB Group’s latest European equity trading report.

Based on TABB’s survey of European managers, the number of commission sharing agreements has grown, as 56% of replying firms plan to increase CSA activity in 2013.  42% of European asset managers surveyed by TABB now use CSAs to pay for independent research bills, highlighting a shift from bulge bracket to independent research.

A recent article in FTSE Global Markets cites Citigroup’s European equity strategist Adrian Cattley, who sees a ‘more challenging’ environment, in part because of turnover.  In 1993, the average length of time a security was held was 25 months, according to Cattley. This fell to just six months in 2007 but since then it has risen sharply and is currently back up to 20 months:  “It’s structural, as more passive fund managers are in the market and active funds are being less active, and it’s cyclical in that fund managers have fallen out of favour with equities and are trading less.”

Another structural problem is that the ­allocation to equities in UK pension funds has fallen to 38.5% in 2012 from 41.1% in 2011, according to the UK pension regulator.


One potential bright spot is the outlook for initial public offerings (IPOs), rights issues or mergers, which according to a survey from Ernst & Young are expected to pick up, led by the US and followed by Europe and Asia later in 2013. Globally the number of IPOs slumped 37% in 2012 to just 768 in the first 11 months, with 50 more expected before the year end. This was down from 1225 deals in 2011.

According to Ernst & Young, global institutional investors are increasingly positive about the IPO market, according to a survey conducted in December with around 300 respondents.  82% of respondents said they have invested in pre-IPO and IPO stocks in 2012, compared to only 18% in either 2010 or 2011.  Nearly three-quarters of the 87 U.S. companies that publicly filed their IPO registration between the start of April and year-end 2012 counted themselves as “emerging-growth,” according to E&Y data.

However, as of mid-February, just 30 issuers had either first submitted or updated registration documents over the past six months to raise a total of roughly $5 billion, according to Ipreo, a market-intelligence firm. That’s the smallest pipeline by deal count and dollar amount since the middle of 2009.


It is not yet clear whether a more positive outlook for U.S. equity commissions will relieve the pressures on cash equities groups.  A mood of caution prevails in the industry.  As we noted last week, ITG is reviewing its product profitability despite reporting during its recent earnings call a positive uptick in trading volumes in January.

According to Coalition, a financial-services data and analytics firm, equity trading staff at global investment banks was 18,400 in the third quarter of 2012, down 8.5% from the end of 2011.  Citigroup in December announced 1,900 cuts in its securities and banking business, which it said were aimed at “areas experiencing continued low profitability such as cash equities.”  Revenue last year at Goldman Sachs’ institutional equities unit was down 1% from a year earlier to $8.2 billion.  Equities-trading revenue was flat in the fourth quarter at Morgan Stanley at $1.3 billion.

Sanford C. Bernstein analysts estimated in November that new rules taking effect over the next decade will further squeeze the equities business. The typical pretax profit margin in equities is 15%, versus 25% for fixed income, commodities and currencies trading.


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