U.S. equity trading commissions appear to be falling so far this year, contrary to expectations.

New research from Greenwich Associates shows that brokerage commissions paid by U.S. institutions on trades of domestic equities decreased 13% to an estimated US$12.1 billion from the first quarter of 2009 to the first quarter this year.


The drop came even though U.S. institutions were predicting that commission payments would surge in 2010. Buy-side traders projected a 15% increase in their commission pool for 2010, and hedge funds predicted a 20% increase in the amount of commissions paid to brokers on trades of domestic stocks, it said.

“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, Greenwich says: trading volumes have fallen off significantly, and, resource-constrained U.S. buy-side institutions are doing everything possible to reduce trading costs.

Indeed, it notes that the average commission rate paid by U.S. institutions to brokers on individual trades of domestic stocks dropped to 2.78¢-per-share in 2010 from 2.90¢ in 2009, partly due to the fact that institutions continue to shift trades from traditional “high-touch” execution to lower-cost electronic and portfolio trading platforms.

Greenwich reports that U.S. institutions executed 37% of domestic equity trading volume through electronic single-stock trades in 2009-2010, up from 36% the prior year. And, among larger accounts the proportion of trading executed electronically reached 44% of volume. And, it says that over the next three years, institutions expect traditional “high-touch” trades to decline to less than half of overall trading volume, with portfolio trades gradually moving to 8%, non algorithmic single-stock electronic trades increasing to 10%, crossing networks/dark pools growing to 13%, and algorithmic strategies increasing to 20%.

“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.”

Of the commission dolarss allocated to sell-side research and related services (approximately $6.4 billion), Greenwich says that institutions used about 27% of that amount to compensate sell-side firms for direct analyst service, 19% to reward brokers for the facilitation of access to corporate management teams, 14% to compensate sponsors of research conferences and 12% to pay brokers for sales service.

“Institutions are now using a combined one-third of their research commissions to compensate brokers for directly arranging meetings with company management teams or for running conferences that provide opportunities for face time with corporate management,” says Greenwich Associates consultant John Feng. “Hedge funds have upped that share to roughly 40%.”

IE