The big are getting bigger.
An increasing portion of overall brokerage revenue from institutional trades is concentrated in the top 10 firms, a recent TABB Group report estimates. Yet despite the boon for the largest shops, a growing percentage of commissions are bypassing high-touch sales trading desks for cheaper electronic executions.
According to TABB, the top ten New York Stock Exchange member brokerages have increased their overall share of industry revenue to 72.5 percent in 2006 from 50 percent in 2000. (The data includes both commissions and trading profits.) And the figure is expected to climb in the coming years as the buyside continues to evolve, says Adam Sussman, a director of research with the consultancy.
“The buyside’s needs and strategies have become so much more sophisticated over the last few years,” he says, “that it’s only the top banks that have the breadth of services necessary to support them.”
Falling blended commission rates and a concomitant reduction in flow sent to small- and mid-tier firms play a role in the concentration of revenue with the biggest firms, TABB says. Other reasons for the concentration include the heavy investments in technology being made by the top brokers — which is giving them a competitive advantage against smaller brokers — as well as the increase in proprietary trading that is adding to their revenues.
“But just because there is concentration, it doesn’t mean the revenues of the smaller brokers is going down,” Sussman says. “A rising tide carries all.”
Equities volumes have been up, he adds. And volatility is good for brokers. The last couple of months have been positive for brokers large and small, in general, Sussman says. However, in a period of lower volume, he adds, the smaller brokers are at greater risk.
The decline in the average commission rates reflects another trend. The buyside is doing more of its trading unabetted by sales traders and subsequently is paying less for those trades.
By the end of this year it will have sent 22 percent less of its order flow to sales trading desks since 2005, according to a February 2008 TABB report on the sellside and high-touch trading. That means more is going through low-touch channels, which include direct market access, broker algorithms and crossing networks.
That will result in an estimated 57-43 commission revenues split in high-touch/low-touch channels by year’s end, according to the report. It compares to a 72-28 split in 2005, and an estimated 53-47 split for 2009.
Also, the buyside is projected to send just 30 percent of its order flow to sales traders by the end of this year.
As the U.S. equities institutional commission revenues are expected to rise to $12.3 billion, from $11.5 billion in 2007, there is a growing incentive for brokerages to develop strategies to draw more high-touch flow their way. According to the report, these include reconfiguring high-touch channels to concentrate on cross-asset class services as well as brokerages burnishing their buyside relationships with direct access to top brokerage executives.
