Fading hopes of an uptick in US trading volumes are leading brokers to scale back their businesses to adjust to a "new normal", according to a report from consultancy Greenwich Associates.
Many had anticipated a resurgence in trading activity as a "great rotation" led to assets being shifted out of fixed income following an increase in rates. However, market participants are no longer optimistic that trading volumes will return to their peak levels and are now reforming their businesses in response.
Q1 2013 US equities trading volumes of around 6.3 billion shares are down by a third from a 2009 high of 9.3 billion. The resulting fall in annual commissions, from almost US$14 billion in 2009 to US$9-10 billion today means brokers will need to aggressively cut their headcount, consolidate their desks and reduce pay, according to Greenwich.
A survey of buy-side institutions found that 81% do not think US equity markets will recover to their pre-crisis levels by 2014.
Continued low volumes are coming at a time when the equity markets are historically strong and Greenwich said this reflects investor buy-and-hold behavior when the market climbs and heavy trading on fear-induced selloffs, suggesting even a shift out of fixed income will not revive the market.
"Given these patterns, it's possible that even with a strong rally sparked by an influx of assets from investors fleeing fixed income, trading activity could be dampened by a continuation o the low volatility and volume that has characterised the recent run-up," said Kevin Kozlowski, analyst at Greenwich Associates.
Another unusual development noted by Greenwich was a stabilizing of the use of high-touch services, despite a belief that electronic execution was set to dominate the market. While the use of sales traders fell from 63% of institutional volume in 2007 to 56% in 2009, this has now stabilised at approximately 56%, indicating that the use of electronic trading has plateaued.
Greenwich suggested this could be because falling volumes have led to falling commission flows, which would previously be used to pay for research and advisory services from brokers. As a result, it may be beneficial to pay for more expensive high-touch services to compensate.