US Commissions Up 11% According to Greenwich

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U.S. equity commission volumes increased 11% during the year ending February according the latest Greenwich Associates survey.  ‘High-touch’ commission rates used to pay for research also increased modestly.  The survey confirms an improved U.S. commission environment over the last year, a welcome relief from five years of steady commission declines.  The positive trend carried into the first quarter of this year, but the second quarter is looking less robust.

Commission Rebound

Greenwich’s annual U.S. Equity Analyst Study estimates that U.S. cash equity commissions increased to $10.34 billion from $9.3 billion for the 12 months ending February 2014.  We estimate that the portion of commissions allocated to research/advisory grew even faster, approximately 16% from $5.4 billion to $6.2 billion.  According to Greenwich, 80% of the overall commission increase came from spending on research and other related services.

Sources: Greenwich Associates, Integrity Research Associates

Higher Commission Rates

Survey respondents also reported that ‘high-touch’ commission rates, which are used to pay for proprietary research, increased from an average of 3.53 cents per share to 3.58 cps as of February 2014.  The increase is small, but breaks the steady decline from the pre-crisis rate of 4 cps.

Greenwich Associates expects the modest increase in high-touch commission rates to continue into 2014, but views this as a recovery to historical norms rather than a long-term upward trend.

Falling Bulge Market Share

Bulge bracket investment banks have continued to lose research market share, according to the survey.  Greenwich tracks 9 bulge bracket firms, 47 smaller broker dealers including regionals and specialist independent research firms, and 19 independent research firms not organized as broker dealers.

In 2007 the bulge bracket had a 78% share of trading and 71% share of research. As of February, the bulge bracket shares have dropped to 64% of trading and 53% of research, with mid-sized/regional brokers, sector specialists and independent research firms benefiting.

Note that the spread between bulge trading share and bulge research share has widened over the last 7 years.  Commission management platforms have helped the bulge firms maintain a larger share of overall commission spending (64%) despite the continued erosion of research market share (currently 53%).

2014 Commission Environment

Although billed as a 2014 report, the Greenwich survey largely reflects the 2013 commission environment.  Nevertheless, the upbeat commission environment extended into the first quarter based on our reading of bulge bracket equities revenues.

Sources: The Wall Street Journal, Credit Suisse Group

Market volumes have been trending down during the second quarter, however, with May registering the lowest trading volume on major U.S. exchanges since 2007.  If desultory volumes continue, it will not bode well for continued improvement in commission spending during 2014.

Outlook

Greenwich expects continued improvements in commissions and rates to ‘historical norms’.  This is an appealing prospect for research providers, but by no means a slam dunk.  On the plus side, hedge funds are a bellwether for research, and continued growth in hedge fund AUM is bullish for commissions.  We expect this trend to continue to be a positive for research.

Another driver of commission growth has been equity allocations.  We have seen increasing allocations to equities from bonds by asset owners.  Unfortunately, that trend is largely behind us.

We suspect that some of the U.S. commission improvement has been fueled by tapering insider trading prosecutions.  We’ve seen a massive rebound in expert network usage over the last eighteen months, and we think that is symptomatic of PMs and analysts getting back to work after an extended compliance freeze.

The larger trends are negative.  Asset allocations continue to shift from active to passive management, which we believe is one of the fundamental drivers of commission declines.  Electronic trading will likely resume a growth trajectory as buy-side (and sell-side) trading resources are constrained, increasing pressure on commission rates.  Regulators, led by the FCA in the UK, are increasingly pressuring commission spending, including bans on payment for corporate access through commissions.

While the commission losing streak has been broken, a major upswing in commission spending is unlikely.  We expect commissions to be up slightly for the year, with worries on whether the uptrend can continue to 2015.

 

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