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July 1, 2012

Commissions Continue Spiral

By John D'Antona Jr.

Commissions paid by U.S. institutions dropped for the third straight year, down 6 percent for domestic equities, according to a recent Greenwich Associates study of the buyside.

Greenwich's 2012 U.S. Equities Investors Study reports that brokerage commissions paid by U.S. institutions on domestic trades were $10.86 billion from Q1 2011 to Q1 2012. That comes after the Street saw a surprising drop last year to $11.55 billion for the same period. That's way off the $13.18 billion reported in the previous survey done in 2010 and a huge 22 percent off the 2009 survey's $13.95 billion.

According to the report, the drop in commissions was unexpected, as previous survey respondents were forecasting commissions would grow by about 8 percent into 2012.

Jay Bennett

"The bottom line is that the entire industry-investors, brokers and other equity research providers-should be preparing to operate in an environment in which there are fewer commission dollars to spend," said Jay Bennett, one of the survey's authors. "The sellside is already moving to adjust their business models to this new reality."

Separately, according to a recent Abel Noser Solutions report, the top ten full service brokers traded nearly $1.7 trillion overall in 2011, which is 34 percent behind the trading volumes of 2010.

Jason Lenzo, head trader director, equity and fixed income trading at Russell Investments, told Traders Magazine that commission spend in large part is driven by portfolio turnover, and that due to large macroeconomic events, such as the European debt crisis and U.S. economic woes, portfolios managers aren't making as many changes to their holdings. Fewer changes, he added, means lower trading volumes for the Street and fewer orders for him to execute.

"Many firms are unwilling to make changes in their new investment strategies decisions or already have their portfolios in a position that is set for the current economic environment," Lenzo said. "It's these factors, this static mind-set, that is contributing to lower trading volumes and the drop in commissions."

Long-only institutions paid 56 percent of their equity brokerage commissions toward research/advisory services for the year ending Q1 2012, a slight rise from 55 percent in the prior 12 months. That left 44 percent to pay for executions, including high- and low-touch electronic trading using algorithms, capital commitments and analytics such as transaction-cost analysis.

John Feng, another author of the report, told Traders Magazine that several brokerages are cutting back on head count, consolidating trading desks and reducing resources dedicated to equities.

The average number of research providers employed by U.S. institutions fell to 38 from 40 during the survey period. Hedge funds trimmed their research lists the most, cutting back to an average 45 providers from 53.

"Smaller brokers and regional players are feeling the most heat here," Feng said.

Greenwich Associates interviewed 227 equity fund managers and 316 U.S. equity traders between December 2011 and February 2012.

The report also shows that there are fewer commission dollars available to spend on research. U.S. institutions spent $6.2 billion in commissions on sellside research from Q1 2011 to Q2 2012. This is off 9 percent from the $6.8 billion spent in the prior 12 months. Greenwich said the main reason for the drop was due primarily to a 6 percent drop in overall commissions paid by institutions to brokers on U.S. equity trades.

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