A reduction in the capital allocated by institutional investors for commission payments in Asia is putting put pressure on smaller sell-side firms operating in the region and will lead to frozen broker lists in 2011.
The findings are part of consultancy Greenwich Associates ”2010 Asian equity investors' study, which shows that the typical Asian-based institution reduced commission payments to brokers by 10% in 2010 compared to 2009 levels.
The paper noted that the pool of commissions paid by institutions was relatively flat from 2009 to 2010, despite strong market performance that drove the MSCI Asia-Pacific index to a two-and-a-half year high in Q4 2010. On a per-capita basis, commissions declined year-on-year.
According to the study, the slowdown in trading activity at the start of 2010 led to a decline in commission payments that left some institutions short in terms of the commission payments available to pay for research-related services. It also limited their ability to allocate trading business beyond their existing broker list, which is expected to impact up-and-coming brokers the hardest, notes the report.
“[There is] less discretionary business to allocate to new brokers looking to break in,” said Greenwich Associates consultant and co-author of the study Jay Bennett. “In fact, the number of research/advisory brokers used by the typical investors has been flat at about 16. While the typical buy-side desk lengthened its trading list from 18 to nearly 20 firms, 55% expect the list to stay steady in the coming year, with the rest split evenly between those expecting to add trading brokers and those that may consolidate their trading business.”
The study also found an unexpected decline in electronic trading across Asia, from 18% of total trading volume in 2009, to 16% in 2010, which the paper says is a result of the pressure placed on institutions to come up with enough commissions to compensate research providers.
However, both the slowdown in commission payments and electronic trading are only thought to be temporary.
“Brokers can take some solace in the fact that the overall Asia ex-Japan/Australia commission pool did grow slightly to about US$2.4 billion for investors domiciled in the region due to the impact of new institutional entrants,” said John Feng, Greenwich Associates consultant and co-author of the report. “More importantly, the picture remains very positive over a longer period, as the Asian commission pool has more than doubled over the past five years, making it one of the fastest growing markets in the world.”
The study also ranked brokers in terms of their business with institutions, with CLSA Asia-Pacific Markets and Credit Suisse both taking a 9.5% share of Asian equity trading. CLSA also accounted for the highest share of Asian equity research/advisory services with an institutional voting share of 10.3%.
Greenwich's study was based on interviews with 259 Asian equity fund managers and analysts, 107 buy-side trading desks and 84 users of equity derivatives products at institutions based in Asia.