A Slowdown in Trading Puts Dent in Equity Brokerage Commission

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A new report from Greenwich Associates shows that the drop in trading volume in U.S. stocks put a dent in the amount of commissions paid by U.S. institutional investors to brokers on those trades. Commissions paid by U.S. institutional investors to brokers on trades of domestic equities declined 6 percent from the first quarter 2011 to the first quarter 2012, according to the results of Greenwich Associates 2012 U.S. Equity Investors Study. The drop helped drive institutional spending on sell-side equity research and advisory services down to $6.2 billion for the year from $6.8 billion in the prior year. It was the third consecutive year overall that institutional brokerage commission payments decreased.

Cutback on Headcount

The study also noted that the “$10.86 billion in total U.S. equity brokerage commissions paid by institutions last year is the lowest amount reported since 2007.” In a press release, Greenwich Associates consultant John Feng noted, "Last year’s decline caught the buy-side by surprise: Institutions in Q1 2011 predicted that the commission pool would expand by 8 percent into 2012. The unexpected shortfall is complicating life for institutions who find themselves short of the commission dollars they expected to use to pay for research and other critical sell-side services. It also puts real pressure on brokers who are falling short of revenue expectations."

Not surprisingly, the study also noted that with a dip in revenue that “several of the brokerage firms with which Greenwich Associates interacts are cutting back on headcount, consolidating trading desks, scaling back coverage and otherwise reducing the level of resources devoted to U.S. equities.” But it was the smaller brokers and regional players that were taking the biggest hit.

Cloudy Skies Ahead

The predictions for the near-term are also not looking too good. The report noted that about 25 percent of the large institutional investors surveyed by Greenwich Associates for its study were looking to “make significant reductions to their active domestic equity allocations by 2014 and 16 percent planned sizable reductions in passive U.S. equity allocations.” What that might mean for headcount isn’t clear, but the trend can’t be a favorable one for the jobs front.

In both cases, a mere 3 percent to 4 percent of institutions were projecting significant increases. “The bottom line is that the entire industry—investors, brokers and other equity research providers—should be preparing to operate in an environment in which there are fewer commission dollars to spend,” noted Greenwich Associates consultant Jay Bennett. “The sell-side is already moving to adjust their businesses to this new reality.”

Institutional Investors Stay with Research

Nonetheless, it appears that research and advisory hasn’t experienced the same hit. According to the report, the share of equity brokerage commissions attributed to research and advisory increased to 56 percent in the year ending as of the first quarter 2012 from 55 percent in the prior 12-month period among investment managers, mutual funds, pensions, endowments and banks.

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