Commissions Down And Remain Under Pressure

The Street saw a 13 percent drop in equity commissions last year, according to a Greenwich Associates study of buyside traders released yesterday. 
Greenwich’s 2010 U.S. Equity Investors Study reports that brokerage commissions paid by U.S. institutions on domestic trades were $12.1 billion from Q1 2009 to Q1 2010. That’s down from the whopping $13.45 billion in commissions reported in the previous survey done in 2009.  

Although the recent survey showed commissions were down 13 percent year over year, the Greenwich report shows that the commission level for the 2010 study were on par with 2008’s–when they reached $12.19 billion.

John Feng, co-author and consultant at Greenwich Associates, told Traders Magazine that falling commissions were the result of a tepid economy and an investor exodus from U.S. stock mutual funds.

Domestic funds saw an outflow of $39.52 billion for 2009, according to the Investment Company Institute. Conversely, foreign stock funds witnessed a $30.71 billion inflow.   

"The buyside expected more of a recovery," Feng said. Hedge funds, he added, also were anticipating more of an economic rebound and an even greater amount of capital to come back into the market.

Greenwich Associates interviewed 219 equity fund managers and 286 U.S. equity traders between December 2009 and February 2010.

The Greenwich study said U.S. institutions entered this year with great optimism–predicting that commission payments would surge in calendar year 2010 with a strong stock market. Buyside traders at long-onlys have projected a 15 percent increase in their commission pool for 2010. Hedge funds, meanwhile, predicted a 20 percent increase in commissions paid for U.S. equities.

But to date, those expectations have proven overly optimistic. "As we passed the mid-way point in the second quarter of 2010," wrote Jay Bennett, a Greenwich Associates consultant, "it becomes evident that, not only will equity commissions fail to reach those growth targets, but the commission pool might actually be contracting,"

The report also shows that commissions remain under pressure. The average "all-in" commission rate paid by U.S. institutions to brokers was 2.78 cents per share in the 2010 study–down from 2.90 cents from 2009’s study. The main culprit was the continued shift toward more electronic trading and its cheaper rates than those of traditional "high touch" executions, according to Greenwich.

"I think the reduction in costs is in part due to the buyside negotiating with the sellside to keep commission rates down," Feng said. Also, he said the continued focus on electronic trading and movement away from high-touch trading is further pushing commission rates down.

U.S. institutions executed 37 percent of their volume for single-stock trades via the machines, Greenwich reported. That’s up from 36 percent the prior year.

Among the most active institutional accounts–those generating more than $50 million in brokerage commissions per year–average rates fell from 2.67 cents to 2.45 cents. For hedge funds, their average rate dropped last year from 2.78 cents to 2.47 cents.
According to Greenwich’s data, large institutional firms are proportionately the biggest consumers of electronic trading products: They executed 44 percent of their volume electronically. That’s up from 41 percent in the 2009 survey. That figure is expected to climb to 47 percent over the next three years.