The U.S. equity market has finally come to the light at the end of the commissions tunnel – growth in broker-dealer fees during the last year.
For the 12 months ending February 2014, the pool of U.S. cash equity commissions increased 10 percent to $10.34 billion from $9.30 billion, according to Greenwich Associates, an equity market consultancy. All-in commission rates also grew slightly for the first time in five years also, ticking up just over 2 percent from 2013 levels.
This is the first time there has been growth in institutional brokerage commissions generated by U.S. equity trades in five years, in 2014 from 2013.
This increase, Greenwich said, was driven largely by investors’ thirst for content-written research, corporate access, market color and analytics providing insight into where their orders are going and where their executions are ultimately coming from. In fact, 80 percent of the commission wallet increase came from spending on research and other related services.
Research, still drives the bus.
The Greenwich findings are from several recent studies, based on 590 interviews with U.S. institutional equity traders and portfolio managers in the first quarter of 2014. The interviews also found that mid-tier brokers have gained share on the bulge bracket, providing both sector specific trading and research services to institutional clients.
But when assessing combined high-touch and low-touch commission flows, the top nine firms still control an aggregate 64 percent share of commission.
“While bulge bracket providers have seen their presence in U.S. equity research eroded, they have done a much better job protecting their actual commission share in trading-the engine of revenues and profits in the equities business,” said Jay Bennett , managing director at Greenwich Associates.
However, the growth in commissions is tempered by the fact that the consultancy found there has been little-to-no growth in electronic trading.
Electronic trades accounted for 37 percent of institutional trading volume in U.S. equities from 2013 to 2014, essentially unchanged from 36 percent the prior year. While the demand for content largely explains the continued share of flow directed to high-touch channels, the lack of growth seen in electronic trading over the period initially appears counterintuitive.
Buyside trading desks are resource constrained, averaging just under four traders according to Greenwich Associates Trading-Desk Optimization Study. Fewer traders handling more flow means increased interest in trading electronically. Due to similar resource constraints and shifting business models, top-tier brokers are encouraging the e-trading behavior investors are asking for. Given this perfect match of incentives, supply and demand should lead to continued e-trading growth. However, despite the buy side’s best intentions, the need for content and other related factors have kept e-trading levels well below expectations.
The sellside competitive landscape also showed signs of its continued evolution, Greeniwch reported. While the top tier still sees the majority of the flow, Greenwich Associates data shows a strong trend towards mid-tier brokers for both execution and research. In 2007 the bulge bracket had a 78 percent share of trading and 71 percent share of research. Now in 2014, the bulge bracket now has only 64 percent of trading and 53 percent of research, with mid-sized/regional brokers and sector specialists benefiting.
The importance of mid-tier brokers is the most noticeable in research, as they now account for 40 percent of the research wallet. When asked which firms are most important for small/mid-cap research and advisory, of the top 10 firms cited by investors seven fall into the mid-tier bucket.
“Investors don’t want a jack-of-all-trades, they want a master-of-one,” said Kevin McPartland, Greenwich Associates head of market structure and technology research.
At first glance, McPartland said this shift seems cause for concern for bulge bracket firms. “After all, big banks have endured margin compression brought on by new capital requirements, shrinkage of formerly high-profit fixed income, currency and commodities (FICC) businesses and a general slowdown in revenues from trading. The loss of share in a cornerstone investment banking function such as equity trading and research could be seen as just one more piece of bad news.”
