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August 1, 2012

Commissions Inch Higher

By Peter Chapman

Options volume is headed down this year, but the institutional commission pool will be up slightly. That's the prognosis from the Tabb Group in a report released recently. Tabb predicted that contract volume would decline by 10 percent this year, following nine straight years of gains. (Actual volume was down 6 percent at mid-year.) But the impact of the downdraft on institutional brokers will be minimal. Tabb expects volume to drop to 4.1 billion contracts this year, down from 4.5 billion in 2011. Still, institutional commissions will hit $2.2 billion, up slightly from $2.1 billion in each of the previous two years.

See Chart: Even Keel

Behind the uptick is an across-the-board increase in commission rates. (See table.) The average per-contract charge for high-touch trades in options costing more than $1, for example, will hit $2.56 this year, according to Tabb, up from $2.36 last year. Electronic trades will hit 78 cents per contract, up from 67 cents last year.

In general, rates are tiered, depending on customer volumes and the liquidity characteristics of the options, according to Tabb. Behind the increase in rates is the decrease in volume and the scarcity of broker capital. The buyside is paying more for each contract as it is sending brokers fewer orders. Among the buyside, it is the hedge funds that are carrying the load, increasing their commission spend by a whopping 23 percent this year. By contrast, traditional asset managers are spending less. Capital is scarcer due to ongoing de-risking by brokers, so firms in need must pay up. Most trades involve multiple legs.

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