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June 30, 1998

Are Commission Rates Finally Slowing Down? Report Notes Levelling in Institutional Equity-Trade

By John A. Byrne

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  • Are Commission Rates Finally Slowing Down? Report Notes Levelling in Institutional Equity-Trade
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An uninterrupted and staggering 20-year decline in the average equity commissions paid to broker dealers by U.S. institutions is slowing unceremoniously, a new report by Greenwich Associates reveals.

"The point of resistance has been reached," said Wayne Wagner, president of the Plexus Group, a Santa Monica, Calif.-based firm that studies institutional-trading costs. "Brokers are simply saying, Let's have no more declines in commissions.'"

Across a range of 400 institutions that responded to the study, Greenwich notes that weighted average commissions in aggregate remained unchanged at 5.6 cents per share for the 12 months ended January 1998, the same average rate of a year earlier.

That's the first yearly measurement taken since 1977 by the Greenwich-based research firm, that average commissions did not decline by roughly one-tenth of one cent each year. (Average commissions are the total commissions reported, divided by the shares executed, irrespective of institutions' weight or size.)

Back in 1977, the average "unweighted" commission was 13.6 cents, compared with 6.4 cents in 1997. Adjusted for inflation, the effective 20-year decline is even more stunning than the more than 50-percent decline.

An official at Greenwich said in an interview that the results in the report, compiled for U.S. institutional equity investors, confirmed what the firm had been anticipating as far back as 1994 that commissions would eventually hold relatively steady. Of course, the closer to zero commission, the smaller the room becomes for rate shrinkage.

Nevertheless, taking the four years starting in 1993, commission rates per share on agency trades, as measured by the reporting institutions' weight, fell until 1995 from 6.3 cents to 6.1 cents to 5.9 cents, and held steady in 1996 and 1997 at 5.6 cents per share.

While some U.S. institutions from mutual funds and pension plans to money managers and other buy-side firms expect downward movement in commissions in the coming year, only the very largest envision slight declines in rates, according to Greenwich.

Increasing Profitability?

But does the study, as the Plexus' Wagner and other experts suggest, really convey that broker dealers are headed for a new period of increasing profitability on the tail of a rip-roaring stock market?

The answer is not that simple. At best, the picture is clouded. For one thing, a breakdown of the unweighted average commissions per share on agency trades shows a divergence in rates paid by the very largest institutions on the one hand, and some of the smallest institutions on the other.

While institutions with total commissions of over $20 million annually saw average commissions dip from 5.7 cents to 5.6 cents, institutions generating commissions of $5 million to $9.9 million reported that their average jumped from 6 cents to 6.2 cents.

On the Nasdaq side, that pattern was only evident between the very small institutions and all the other reporting institutions. Imputed commissions for these smaller buy-side firms rose significantly, while the commissions actually declined for all the rest. (Imputed commission, classified by traders as net-trading costs paid as Nasdaq credits to market makers, are implied by factoring the stock value plus the spread divided by the number of shares executed.)