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US equity trading business falling short of expectations

Commissions paid by institutional investors to brokers on trades of US equities are falling far short of projections to this point in 2010. 

The results of Greenwich Associates’ latest US Equity Investors Study reveal that the amount of brokerage commissions paid by US institutions on trades of domestic equities decreased 13 per cent to an estimated USD12.1bn from Q1 2009 to Q1 2010.

Despite that falloff, US institutions entered this year predicting that commission payments would surge in calendar year 2010 in step with expected strength in both stock market performance and trading volume.

Buy-side traders at US institutions projected a 15 per cent increase in their commission pool for 2010, with hedge funds predicting a 20 per cent increase in the amount of commissions paid to brokers on trades of domestic stocks.
“As we passed the mid-way point in the second quarter of 2010 it become evident that, not only will equity commissions fail to reach those growth targets, the commission pool might actually be contracting,” says Greenwich Associates consultant Jay Bennett.
A contraction in institutional commission payments indicates two things: trading volumes have fallen off significantly, and resource-constrained US buy-side institutions are doing everything possible to reduce trading costs.

Greenwich says there is little doubt that the first factor was in evidence earlier this year. Consolidated trading volumes in NYSE listed stocks in the first quarter were off significantly from Q1 2009.

As for the latter point, the average “all-in” commission rate paid by US institutions to brokers on individual trades of domestic stocks dropped to 2.78 cents per share in 2010 from 2.90 cents in 2009, in part due to the fact that institutions continue to shift trades from traditional “high-touch” execution to lower-cost electronic and portfolio trading platforms.
“The fact that actual institutional commission payments are falling short of projections will create obvious pressures for equity brokers, but there will be ramifications for institutions as well,” says Greenwich Associates consultant John Colon. “Specifically, they will have less commission currency than they had expected to pay for sell-side research and other services.”

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