Trading Fees Seen Hitting Records in 2006

Strong trading volumes will likely offset lower fees that U.S. broker-dealers charge their customers and result in a record year in terms of commissions, according to the Securities Industry Association's latest survey.

Although the SIA expects a "significantly weaker" performance related to the U.S. economic slowdown in the second half, the torrid pace of trading in the first half "virtually assured that results for this year as a whole would easily exceed those registered in 2005."

SIA economist Frank Fernandez, who authored the survey, said: "During the second half of 2006, we expect commission income to decline relative to first-half levels... for the year as a whole, we expect commission and fee income to total $51.2 billion, 11 percent above the results obtained in 2005."

Last year marked a record in terms of revenues generated by commission and fees at U.S. broker-dealers, according to the SIA series.

Trading volume growth is boosted by computer-driven activity, particularly due to the increased endorsement of algorithmic and program trading by institutional customers. While these strategies are expected to account for an increasing share of overall trading, they command lower fees and commissions.

Trading commission and fee income reached an estimated $13.5 billion in the second quarter, 5 percent above the first quarter's already robust $12.9 billion performance and 21.2 percent above the same period of 2005, the SIA said.

Profits that broker-dealers generate when trading for their own account surged to $11.6 billion in the first quarter, nearly twice their levels in the prior quarter. Those profits moderated in the second quarter, to an estimated $9 billion.

Fernandez noted: "Anecdotal information suggests that activity at trading desks has returned to more normal levels thus far in the third quarter, as fewer traders are taking outsized bets during the seasonally slower summer months."

Fernandez also expected trading in the fourth quarter to return to historical trend levels. "However, thanks to the exceptional first half, when many firms registered record results, trading gains for full year 2006 are expected to reach $31.9 billion, 36.7 percent or $8.6 billion higher than during 2005 and nearly matching the record trading gains of $32.3 billion enjoyed in 2001."