Long-only asset managers in the US reduced their commission pool in 2010 while maintaining a fixed set of core brokers, as buy-side firms in the UK and Europe saw an increase in the number of brokers used and commission paid compared to 2009.
That is the conclusion of a study by TABB Group, titled ”Trading for alpha 2011: Commission sharing agreements (CSA) in the US and Europe', which found that in 2010, gross equity commission rates in the US fell 17.48% to US$8.71 billion, compared to 2009.
Moreover, the number of core brokers used dropped by one percentage point to an average of 12.2%. The study found that 49% of all buy-side firms hold CSAs with less than 10 brokers and on average 9.3 CSA brokers were used across buy-side firms in the US.
In Europe the number of core brokers used by the buy-side grew from an average of 9.4 in 2009 to 10 in 2010. The number of CSA brokers used in the UK was predicted to rise in 2011 to 12.7 from 11.7 in 2010, with the rest of Europe expecting growth in the number of CSA brokers used by buy-side firms from 6.6 to 6.9 on average. Gross commissions in Europe grew 5.4% to US$4.439 billion year-on-year in 2010.
Laurie Berke, a TABB principal and author of the study, said that the economic significance of the increased commission concentration is “the elephant in the corner of the equity trading room”. TABB estimates that the total equity commission pool generated by long-only asset managers in the US and Europe shrank to US$13.2 billion in 2010, nearly an 18% decline year-over-year in the US and minus 23.5% CAGR since 2008 in Europe.
According to the study improved analysis by buy-side firms of broker performance gives asset managers a better position from which to negotiate and puts pressure on sell-side firms to deliver.
For this reason it is full-service players who can penetrate the buy-side organisation by delivering investment insight and analysis, cross-asset, cross-currency trading and trade processing, Berke says, who will likely gain even greater market share at the expense of the mid-tier player who has only one or two core capabilities.
“In the end, though, that old sell-side question, ”What have you done for me lately?' is forever going to be a two-way conversation. Brokers who just can't compete or merely deliver mediocre services will lose market share rapidly,” she adds.
TABB Group spoke with 121 institutional equity management firms for this interview-based study, including 68 head traders in the US and 53 head traders in the UK and Europe, managing an aggregate of US$$12.9 trillion and €13.5 trillion (US$18.2 trillion).