Where have all the commissions gone?


Greenwich Associates released their latest U.S. Equity Investors Study and the report shows that commissions paid to brokerages are down about 13% from this time last year.  The finding goes against the previously widely held belief that commissions were set to surge in 2010 due to stock performance and an increase in trading volumes.  In fact, Greenwich’s estimates showed that buy-siders were expecting a 15% increase in their commission pools for 2010 and hedge funds in particular predicted even a slightly larger increase of 20%.

The decrease in commissions can be traced back to two different causes: a decline in trading volumes and a shift to lower cost execution.  Lower trading volumes were definitely in evidence as “Consolidated trading volumes in NYSE listed stocks in the first quarter were off significantly from Q1 2009.”  The average commission rate paid also dipped from 2.9 cents in 2009 to 2.78 cents in 2010, showing that firms are seeking out less bundled commission services and moving more towards lower cost electronic trading options.

The increased use of lower cost execution options and a move away from high touch commission trading will continue to pressure the sell-side research industry. Traditionally, one reason to use a higher touch commission service has been the research associated with it, however new findings suggest that “over the next three years, institutions expect traditional ‘high-touch’ trades to decline to less than half of overall trading volume”.  Right now, Greenwich estimates that 53% of U.S. equity commission payments are allocated to sell-side research and related services, and that 27% of that amount is used to “compensate sell-side firms for direct analyst service”.

Also mentioned in the article is the fact that 19% of commission payments are currently seen as compensation for access to corporate management teams.  14% of the commissions are in appreciation of research conferences and 12% pay for brokers sales services.  Greenwich also mentions that Hedge Funds value the management access portion of the bundled services more highly than their other investment brethren.

The increased availability of independent research (Integrity’s database has recently grown to over 3,300 firms) has provided another way for the buy-side to get the investment research they use.  When used in conjunction with low cost trading, these independent shops become an attractive option, with CSA and soft dollar arrangements making it even easier to pay independents.


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