The Incredible Shrinking Equity Commission Pie


New York, NY – According to a study released last week by consultant, Greenwich Associates, the US equity commission pool has fallen for the third consecutive year to a level not seen since 2007.  The continued drop in equity commissions not only has had a negative impact on the sell-side, but also on the buy-side who are increasingly short on the currency needed to pay for research and other important sell-side services.

Continued Contraction in Equity Commissions

Greenwich Associates reports that the amount of equity commissions paid by U.S. Institutional Investors to brokers dropped 6% in Q1 2012 from the previous year to $10.86 bln – a level not seen since 2007.  The most recent decline marks the third consecutive annual drop in the total US equity commission pool, and puts the current commission level close to 22% below the levels seen in Q1 2009.  This trend is not surprising as U.S. equity trading volumes have plunged 35% in the past few years from 8.5 billion shares to 6.5 billion shares this year.

The decline in the overall equity commission pool has forced the buy-side to reduce the number of research providers they pay – from 40 firms in the year ended Q1 2011 to 38 firms in the most recent twelve months ended Q1 2012.  The bulk of this decline came from hedge funds that reduced the number of research providers from roughly 53 firms to 45 firms over this period.  Long-only investors, on the other hand, reduced research firms from 36 to 35 over the past twelve month period.

Hedge funds and long only investors have also reduced the number of executing brokers that they use, from 44 brokers in Q1 2011 to 43 brokers in Q1 2012.

As you might guess, this decline in commission revenue has had a significant impact on the sell-side, as many firms have either cut back on headcount, scaled back coverage, consolidated trading desks, and reduced the amount of resources they allocate to US equities.  We have previously reported on many of the mergers or closures seen in the US equity brokerage space over the past twelve months.

Fewer Research Dollars to Go Around

According to the Greenwich survey, U.S. buy-side firms spent approximately $6.2 bln for equity research services during the twelve months ended Q1 2012 – almost 9% below the $6.8 bln spending level seen in the previous year.  This level also put current buy-side research spending almost 21% below the peak of $7.8 bln seen in Q1 2009.

This year’s drop was brought about by two factors, including the 6% decline in the overall equity commission pool, and the reduction in the overall share of commissions used to pay for research.  Hedge funds allocated 59% of their commissions to pay their brokers for research in the period ended Q1 2012, compared to 68% in the period ended Q1 2011.  Long-only investors actually increased their allocation to research – from 55% in Q1 2011 to 56% in Q1 2012.

It is interesting to note that in Q1 2012, hedge funds allocated 27% of the commission to sales trading and agency execution versus 22% in the prior year.  In addition, hedge funds increased their allocation to capital commitment, from 9% in Q1 2011 to 13% in Q1 2012.  Long only investors, however, reduced their allocation for sales trading and agency execution services from 35% in Q1 2011 to 34% in the most recent twelve month period.  Long-only investors allocated 6% for capital commitment in Q1 2012, up slightly from 5% in the previous period.


Research Advisory

Commission Allocations

Hedge Funds

Long-Only Investors


2011 2012


Access to company management


31% 19%


Analyst service


23% 24%


Research conferences & seminars


13% 13%


Sales service


12% 13%


Indiv. company / industry studies


4% 11%


Thematic investment ideas or specific stock recommendations


7% 8%


Economic analysis & portfolio strategy advice


6% 8%


Expert networks


N/A 1%


Customized or bespoke research


2% 1%


Other (including global research)


1% 2%



Greenwich Associates estimates that nearly 75% of U.S. equity commission dollars that the buy-side spends on research goes towards access to company management and analysts.  As you can see from the above table, in the twelve month period ended Q1 2012 hedge funds allocated 75% of commissions to company management, analyst service, research conferences and seminars, and sales service.  Hedge funds allocated only 25% of their commission dollars to the written research product during this period.  Long-only investors, on the other hand, allocated 69% to these services, leaving 31% for the written research product.

Greenwich Conclusions

Based on the results of this market research, Greenwich Associates came up with three main projections.  The first is that U.S. Equity commissions are likely to remain depressed for the foreseeable future.  This is based on the finding that approximately 25% of large buy-side investors surveyed by Greenwich Associates in 2011 said they plan to make significant reductions to their active US equity allocations by 2014, and 16% plan sizable reductions in their passive US equity allocations.  This compares to only 3% to 4% that plan significant increases.

Greenwich also worries that institutional investors could start reducing their broker relationships more significantly.  This is based on the view that many sell-side firms are likely to begin pressuring their best buy-side clients to pay them more, leading institutions to struggle with how to reward their most important trading and research relationships in a period of declining equity commissions.

Lastly, Greenwich feels that research is likely to attract a growing share of US commission dollar in the future.  This conclusion is based on the fact that the sell-side research product has a significant fixed cost component – including compensation to pay analysts and salespeople.  As the commission revenue required to support this service continues to fall, it is likely that institutional investors will be required to allocate a larger and larger share of the equity commission to pay for sell-side research.


Integrity’s Assessment

So, what does the team at Integrity think about this most recent Greenwich Associates study?  All of the survey’s findings and conclusions seem to be consistent with everything we have been hearing from the buy-side, sell-side, and the ranks of independent research firms.  The U.S. equity market is getting increasingly more difficult for everyone involved – execution providers, research providers, and institutional investors – and there doesn’t seem to be any real relief on the horizon.  Consequently, we think all participants in the U.S. equity market need to reassess their business models and adopt new tactics and strategies to be able to survive and even thrive in this new normal.

The only glimmer of hope we see in this study is the fact that the buy-side will probably need to pare down their list of research providers so they can better reward the limited number of research firms that drive the most value to their investment process.  This means that adding significant value will only become more important for sell-side and independent research providers in the future.




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