As both institutional commissions and trading volumes have fallen, the relationship between the buyside and sellside has entered a new phase.
According to a report by Greenwich Associates, titled U.S. Equities: Five Reasons Why the Great Rotation Might Not Be So Great, Q1 2013 daily trading volume in U.S. equities is down to about 6.3 billion shares, or down roughly one-third from the 2009 market high of 9.3 billion.
The lower volume is leading to a realignment in the way the buyside and sellside interact.
For starters, brokers have entered a reset period that sees them scaling back their business practices to align with a U.S. equity market of about $9 billion to $10 billion in annual institutional commissions. According to John Feng, market analyst for Greenwich Associates and author of the report, brokers are aggressively right-sizing their businesses by reducing head counts, consolidating desks and cutting compensation.
This is not lost on the buyside. Feng says buysiders are seeing some service disruptions from their sellside counterparts, as well as reduced liquidity.
Commissions are the currency the buyside uses to buy services, Feng told Traders Magazine. They are trying to be discriminating consumers and retain access to prices, services, research and corporate access. The buyside is trying to do more with less at higher efficiency.
Dennis Fox, head trader for Munder Capital Management of Birmingham, Mich., agrees that tighter commission rates are having an impact on old procedures for the buyside. Expectations are changing, he told Traders Magazine. As commission dollars are down, we are going to pay people less.
If the commission pool continues to dwindle, Feng said the sellside might rethink its level of service.