Commissions paid to institutional US brokers has fallen well below expectations so far in 2010, but some of the shortfall in equities spend could be recovered from a surge in options trading.
According to consultancy Greenwich Associates’ latest survey of US equity investors, commissions paid to brokerages have sunk by 13% to an estimated $12.1 billion in Q1 2010 compared to the first quarter of 2009.
Institutions had expected commission payments to rebound this year, in line with a recovery of equity trading activity and performance. Greenwich said US buy-side firms projected a 15% increase in their commission pool for 2010, while hedge funds predicted a 20% rise in the amount paid to brokers for domestic stocks trades.
According to consultant Jay Bennett, resource constraints placed on buy-side firms have diminished the pool of cash available for broker payments. “As we passed the mid-way point in the second quarter of 2010, it become evident that, not only will equity commissions fail to reach those growth targets, the commission pool might actually be contracting,” said Bennett.
As part of a continuing buy-side drive to reduce costs, the study points out that trading firms are executing more volume via electronic trading channels, with 37% of US single stock trades executed electronically in 2009, up from 36% the previous year.
The study found that algorithmic strategies account for 18% of total US trading volume currently, but expects this to rise to over 50% over the next three years, comprising electronic portfolio trades (8%), non-algorithmic electronic single stock trades (10%), dark pool trading (13%) and algorithmic strategies (20%).
In addition, the commission rate paid to brokers on domestic stocks is currently 2.78 cents per share, compared to 2.9 cents per share in 2009, further evidence of the move away from high-touch trading to low-cost electronic strategies.
However, part of the reduction in payments for equity trading could be supplemented with an increase in options commissions to US brokers, according to fellow consultancy TABB Group.
A new study, ‘US Options Trading 2010: The Resurgence of the Broker’, predicts that continued volatility and an increasing appetite among buy-side firms for options strategies will result in record trading levels this year, with commissions expected to grow by 15% this year, to $3 billion.
“Trading volume continues to grow, spreads have narrowed and broker support has never been stronger” said Andy Nybo, principal, TABB and author of the report. “The buy-side is bullish on options, and so are brokers, inundating their buy-side clients with trading support and capital. Options-centric strategies that leverage volatility are being adopted by more aggressive hedge funds and, increasingly, more experienced traders at traditional asset management funds.”
The trend towards increased options trading will not be isolated to the US, adds Nybo.
“Global options brokers have seen the pot of gold and are building option desks by recruiting seasoned staff and providing deep capital support,” he said. “Risk management will continue to be a priority for buy-side traders and options appeal as an asset class is only in its infancy.”
TABB interviewed 51 traders at asset managers, hedge funds and proprietary trading firms with an aggregate $2.5 trillion of assets under management, trading an average 14.3 million contracts monthly.