US equity commissions drop for third year in succession

Commissions paid by US institutional investors on domestic equity trades have fallen for the third year in a row, hitting $10.86 bn for the 12 months ending Q1 2012, to reach its lowest level since 2007. The decline has driven down the amount paid for equity research during the same period, from $6.8 bn to $6.2 bn, according to the most recent institutional investor survey by Greenwich Associates.

And the outlook for the coming year is more of the same, Greenwich reports. Approximately a quarter of large institutional investors plan to make ‘significant reductions’ to active domestic equity allocations and 16 percent plan ‘sizable reductions’ in passive US equity allocations by 2014. 

Greenwich said several brokerage firms are ‘cutting back on headcount, consolidating trading desks, scaling back coverage and otherwise reducing the level of resources devoted to US equities. Smaller brokers and regional players are feeling the most heat.’

But while the commission dollar ‘pie’ is shrinking overall, the share allocated to equity research continued to rise among long-only managers, from 55 percent to 56 percent, Greenwich reports.

‘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,’ Greenwich Associates consultant Jay Bennett said in a prepared release. ‘The sell-side is already moving to adjust their businesses to this new reality.’

Greenwich points to expected pressure from sell-side firms to make institutional clients pay more, which will force the buy side to accelerate consolidation of broker relationships as they struggle to allocate the shrinking commission dollars.

Integrity Research, a firm that follows the equity research industry and advises buy-side clients on their research relationships, said in a note to clients that the Greenwich study confirms trends it is seeing in the market. ‘All participants in the US equity market need to reassess their business models and adopt new tactics and strategies to be able to survive and even thrive in this new normal,’ the note said.

‘The only glimmer of hope we see in this study is the fact that the buy side will probably need to pare down their list of research providers so they can better reward the limited number of research firms that drive the most value to their investment process.  This means that adding significant value will only become more important for sell side and independent research providers in the future,’ the note added.