Buy-side commission decline at an end – report

Buy-side commission budgets have begun to stabilise, but brokers cannot rest on their laurels and expect to maintain their market share, according to research from Woodbine Associates.

Buy-side commission budgets have begun to stabilise, but brokers cannot rest on their laurels and expect to maintain their market share, according to research from Woodbine Associates.

A survey of 49 long-only and traditional asset managers found expected commission spend in the US in 2015 is expected to exceed the previous year for the first time since 2009. Estimated commission spend among the survey sample in 2015 is forecast to be 2.6% higher than 2014 at $1.55 billion. In 2014 commission spend fell by 3.8% compared to 2013.

Matt Samelson, CEO and director of equities at Woodbine Associates, said: “The erosion of commission spending appears to have bottomed out in 2014, but we don’t expect asset managers to be significantly increasing the size of their wallet until at least the next presidential election in 2016 so the market is likely to remain relatively flat.”

Woodbine’s research also found a considerable quantity of commission spend is discretionary, roughly 75% across the whole market, equivalent to approximately $7.5 billion.

This should create a significant opportunity for the sell-side to win market share from their competitors by offering superior execution services and quality to clients.

However, the research notes there is a contradiction in the market, where brokers claim they cannot grow their business as large proportions of buy-side wallets have been directed towards research commitments.

“It’s hard to say where this is coming from, are the buy-side telling brokers they have no discretionary commission spend in order to prevent them hounding them for business?” asked Samelson, “Or does the sell-side use this as a way to explain why they are not performing and capturing more market share?”

While there is some uncertainty about how the sell-side is responding to this, Woodbine suggests that increased unbundling of research and execution commissions is helping to give the buy-side the opportunity to more readily seek out the best execution providers.

“I think we’ll see continued use of commission sharing in the US market as it’s a highly effective mechanism and is desirable for both brokers and asset managers as it will result in less waste and more effective research market, as well as improve overall execution quality,” Samelson added.

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