Broker Fees for U.S. Stock Trading Fell to Lowest Since 2006
U.S. securities firms received the lowest commissions from equities trading since 2006 amid a fifth straight year of outflows from stock funds and the worst returns during the bull market that began in 2009.
The industry split $10.9 billion in fees last year from asset managers, down 6 percent from 2010, according to data compiled by Greenwich Associates. Survey respondents told the Stamford, Connecticut-based research firm that they expect the fees they pay U.S. brokers to buy or sell equity securities to increase to $11.4 billion in 2012. The increase projected a year ago failed to materialize, Greenwich Associates said.
Wall Street firms have cut compensation and eliminated jobs as business slows. During the fourth quarter, the six largest U.S. banks saw a third straight drop in combined trading and investment-banking revenue. Lower commissions put pressure on asset managers to consolidate more of their trading with larger brokers, according to Jay Bennett, a managing director in the equities group at Greenwich Associates.
“Brokers must balance revenue with cost,” he said in a phone interview. “They say to asset managers, ‘How can you, Mr. Client, help me on that score?’ That means the asset manager needs to concentrate more business with the firm, and that makes it harder to spread it down to the second or third tier of brokers.”
Brokers are also seeking to complete more trading electronically since automated transactions are cheaper to execute than those handled manually, Bennett said. Electronic trades carry lower commission rates, he said.
The Greenwich Associates report was based on responses from 316 trading desks, in some cases more than one at the same company. Commissions for the 561 institutions Greenwich Associates analyzes were then extrapolated from the responses. Some participants gave results for calendar year 2011, while others gave fee data for 12-month periods ending in the first quarter of 2012, Greenwich Associates said.
“When you have a smaller pool, you’re trying to get more with less,” said George Bodine, the former director of trading at General Motors Asset Management and now a vice president of data analytics and research at Markit Group Ltd., a financial data provider based in London. “It hampers your ability to have access to brokers and hurts smaller and mid-size firms more,” Bodine said in a phone interview. “It’s a real scramble.”
Many fund managers compensate brokerages for research and advisory services by steering business to them. Asset managers got research from an average of 38 firms and used 43 brokers to trade last year, according to Greenwich Associates.
Asset managers paid $6.2 billion for research and advisory services last year, or 57 percent of total commissions, Greenwich Associates said. Mutual funds and traditional investment firms used 56 percent of their commissions for research, including access to analysts and corporate executives, while hedge funds spent 59 percent for those services, down from 68 percent a year earlier, the report said.
Investors pulled money from mutual funds that buy U.S. stocks for a fifth straight year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. They removed money as the intensifying European debt crisis and concern about the U.S. budget deficit drove the Standard & Poor’s 500 Index (SPX) to a 19 percent decline between April and October of last year.
Credit Suisse Group AG (CS) won the most U.S. equity trading volume from institutional customers based on commissions spent last year, capturing 9.5 percent of the total, according to a Greenwich Associates study released on May 29. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) were tied in second place, while Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) were in fourth place, the study said.
Asset managers voted JPMorgan the most valuable for research and advisory services, on a commissions-weighted basis, Greenwich Associates said. Credit Suisse did the most business in portfolio trading, a category that involves buying or selling baskets of stock, based on the total dollar volume.
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