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August 1, 2011

High-Touch, Research Up In Survey

By John D'Antona Jr.

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  • High-Touch, Research Up In Survey
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High-touch and research-driven trades rose last year, but the Street also felt the pain of a 12 percent drop in commissions, according to a recent Greenwich Associates study of the buyside.

Greenwich's 2011 U.S. Equities Investors Study reports that brokerage commissions paid by U.S. institutions on domestic trades were $11.55 billion from Q1 2010 to Q1 2011. That's substantially lower than the $13.18 billion reported in the previous survey, done in 2010, and a whopping 17 percent off the 2009 survey's $13.95 billion.

According to the report, the drop in commissions was unexpected, as previous survey respondents were predicting the pool of money would grow by about 15 percent during the survey year.

Cheryl Cargie

"We weren't necessarily looking for a rise in commissions per se, but we were hoping they'd at least be flat," said Cheryl Cargie, head trader at Ariel Capital Management in Chicago. "But the sad truth is, they're down."

Greenwich Associates interviewed 217 equity fund managers and 304 U.S. equity traders between November 2010 and February 2011.

"Throughout 2010 there was a lack of conviction among investors, and more cash that people expected to enter the market remained on the sidelines, keeping trading volumes unexpectedly low," said Jay Bennett, one of the survey's authors. "Although institutions seem to have gained some confidence that markets will stabilize and trading activity will pick up in 2011, there is still a considerable degree of ambivalence."

Cargie said trading flows in the next six months are likely to be modest, continuing to follow the lead of the first half of the year with no discernable increase. Low volatility, she said, was the main reason for subpar trading volume. "The market really needs a catalyst to get things going again."

The report also shows that commission rates remain under pressure. The average "all-in" commission rate paid by U.S. institutions to brokers was 3.7 cents per share in the 2011 study-down from 3.8 cents from 2010's study. The main culprit, Greenwich said, wasn't a migration to e-trading systems-which actually declined as a share of overall trading volume last year-but rather a decline in the average commission rate for normal, high-tough agency trades.

As a result of falling commissions, the buyside has altered its trading strategies. Greenwich said buyside traders are increasingly shying away from trading electronically and executing more trades via high-touch.

"We are doing more high-touch trades than low-touch this year," Cargie said. "It's really hard to get blocks done in this fragmented market."

By doing trades in a high-touch fashion, Cargie can discreetly find the size she needs without telegraphing her intentions to others in the market. Trading her orders in a low-touch fashion leaves too big a footprint.