Trading Volume Should Return in Fourth Quarter: Tabb
Traders Magazine Online News, February 21, 2012
A recent study by Tabb Group paints a dismal picture of the industry, with institutional equity brokerage likely to see its third annual decline in commissions. On the other hand, Tabb sees the current low-volatility, low-volume environment as a necessary precursor for an eventual market recovery.
In a report titled “U.S. Institutional Equities: State of the Industry 2012,” Tabb predicted single-stock volume will not rebound until the fourth quarter of this year. Under those conditions, concentration among brokers will increase, the report said.
Joan Stack
Tabb interviewed 60 buyside mutual fund traders and 60 hedge fund traders. It also looked at historical data to come up with its analysis.
Last year, investors pulled $168 billion out of the U.S. equity market, and while the report did not predict similar outflows for 2012, Tabb did say it believes equity trading volumes will decline modestly this year, only picking up steam at the end of 2012 and into 2013.
Lackluster volumes have had a depressing effect on revenues for brokers, with commissions from hedge funds in particular falling precipitously. Execution-only commissions for U.S. institutional brokerages will fall an additional 11 percent this year, Tabb predicted, recovering somewhat next year but still remaining below 2010 levels.
Joan Stack, trading manager at the Ohio Public Employees Retirement System, the nation’s 12th largest public pension fund with $46.9 billion in equity assets under management, told Traders Magazine the trend of lower commission spend has been driven by the ever increasing use of direct market access, algorithms and alternative trading systems.
Stack said equity execution is a low-margin business. Seeing formerly execution-only firms such as BTIG and ITG add research products indicates to her that execution-only is a tough business model for some market cycles.
“The increased integration/acceptance of TCA on the buyside may have hurt some execution-only shops that relied primarily on relationships,” said Stack, adding that electronic trading’s growth has further eroded execution-only market share.
Craig Jensen, principal and head of trading at New Canaan, Conn.-based Armstrong Shaw Associates which manages $3.4 billion, added that using an execution-only broker and paying for research via a commission sharing agreement may not always get the best bang for the buyside’s buck.
“Getting good execution and research under one roof could favor using a full service broker,” he said. “There are several things to consider, but research continues to play an increased role in deciding where to trade.”
OPERS, while not divulging specifics, said it has cut down on the number of brokers it uses to execute orders, and with a few exceptions, the ones it keeps all provide research.
One longtime sellside executive agreed to a point with Tabb’s conclusion that volume will make a comeback in the fourth quarter. But that depends on whether the prop desks get back into the market. He added that in 2011 volume dropped after both AIG and Citi did reverse splits. In Citi’s case, its daily volume went from 480 million shares a day to about 40 million after the 10-to-one reverse split.
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