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July 1, 2010

Commissions Off--Pressure Remains

By John D'Antona Jr.

The Street saw a 13 percent drop in equity commissions last year, according to a Greenwich Associates study of buyside traders released June 7.[IMGCAP(1)]


See Chart: Total Estimated Commissions Generated in U.S. Equities


Greenwich's 2010 U.S. Equity Investors Study reports that brokerage commissions paid by U.S. institutions on domestic trades were $12.1 billion from Q1 2009 to Q1 2010. That's down from the whopping $13.45 billion in commissions reported in the 2009 survey.

Although the recent survey showed commissions were down 13 percent year over year, the Greenwich report shows that commission levels for the 2010 study were on par with 2008's--when they reached $12.19 billion.

John Feng, co-author of the study at Greenwich Associates, told Traders Magazine that falling commissions were the result of a tepid economy and an investor exodus from U.S. stock mutual funds.

Domestic funds saw an outflow of $39.52 billion for 2009, according to the Investment Company Institute. Conversely, foreign stock funds witnessed a $30.71 billion inflow.

"The buyside expected more of a recovery," Feng said.

Greenwich Associates interviewed 219 equity fund managers and 286 U.S. equity traders between December 2009 and February 2010.

The Greenwich study said U.S. institutions entered this year with great optimism--predicting that commission payments would surge in calendar year 2010 with a strong stock market. Buyside traders at long-onlys have projected a 15 percent increase in their commission pool for 2010. Hedge funds, meanwhile, predicted a 20 percent increase in commissions paid for U.S. equities.

But to date, those expectations have proven overly optimistic. "As we passed the midway point in the second quarter of 2010," wrote Jay Bennett, a Greenwich Associates consultant, "it becomes evident that, not only will equity commissions fail to reach those growth targets, but the commission pool might actually be contracting,"

The report also shows that commissions remain under pressure. The average "all-in" commission rate paid by U.S. institutions to brokers was 2.78 cents per share in the 2010 study--down from 2.90 cents from 2009's study. The main culprit was the continued shift toward electronic trading, where rates are cheaper than "high-touch" executions, according to Greenwich.

U.S. institutions executed 37 percent of their volume for single-stock trades via the machines, Greenwich reported.


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