Investment institutions’ appetite for broker research has fed the first rise in commissions paid to brokers for US equity trades in five years, according to one of a trio of research reports released by Greenwich Associates this week.
US cash equity commissions grew 10% from US$9.30 billion to US$10.34 billion in the 12 months to February 2014, said Greenwich, noting that investment managers accounted for 55% of total wallet, up from 46% in 2011, with hedge funds accounting for 23% of the commission pool (versus 28% in 2011). Interviewees from hedge funds predicted a 9% increase in the US cash equity commission pool by the end of the year, compared with a 3% expansion expected by long-only firms.
Noting all-in commission rates of 2.3% and a 3% year-on-year decline in total US equity market volumes, Greenwich said investors were increasing their spend with brokers to maintain access to content, including research notes, corporate access, market intelligence and “analytics providing insight into where their orders are going and where their executions are ultimately coming from”. Investors were both using high-touch execution services to retain access to research and paying a ‘tack-on’ rate over and above the base execution rate.
Greenwich Associates also released reports that showed a stagnation in the growth of electronic trading volumes in the US equity market, but an upsurge in the research market share of mid-tier and specialist brokers. Reporting that single stock electronic trading volumes had risen one percentage point to 37% in 2014 (but remaining below 2010’s peak of 38%), Greenwich observed that “demand for content largely explains the continued share of flow directed to high-touch channels”.
But Greenwich nevertheless insisted that demand for content did not mean that the value of electronic trading offerings was being discounted by survey participants. “A renewed focus by investors on how orders are handled and where they are ultimately executed means that perceived broker quality is nearly as important as the accuracy of the broker’s VWAP algorithm,” the report said. According the Greenwich Quality Index – the firm’s methodology for compiling survey respondents’ evaluations of brokers’ sales and electronic trading services – Credit Suisse, Goldman Sachs and Morgan Stanley were topped ranked for sales trading and trading quality, while Credit Suisse and RBC Capital Markets were ranked highest for electronic trading quality.
In the third of its Q2 2103 reports, Greenwich also found that mid-tier brokers were benefiting from investors’ need for research. The firm found that the bulge bracket’s share of trading had fallen from 78% in 2007 to 64% in 2014, while its share of the research market had tumbled from 71% to 53%. Observing the cuts in research teams at bulge bracket firms since the financial crisis, Greenwich said such firms were now “punching above their weight” in terms of their ability to protect their commission share in trading.
The surveys were based on interviews with 316 buy-side US equity traders and 225 US equity portfolio managers conducted in Q1 2014.