U.S. Institutional Equity Trading Commissions Jump 25% to $8.9BN in 2021, According to Bloomberg Intelligence

IPOs, surging volume, volatility and liquidity needs, allowed brokers to charge dramatically higher rates

New York, December 14, 2021 – U.S. institutional equity commissions surged 25% to $8.9 billion in 2021, the largest pool since 2016 when it reached an estimated $10.1 billion. Key drivers for the drastic increase in U.S. equity commissions were a full calendar of initial public offerings (IPOs), more demand for research and the positive performance of active managers in 2020, according to a new survey of over 100 head and senior buy-side equity traders by Bloomberg Intelligence (BI).

U.S.-based IPOs raised $128bn in 2021 – a 51% increase from the prior year and more than double of the amount raised in Europe. Although commissions are not inherently linked to IPOs, BI sees increasing rates and flow concentration to the largest brokers, which dominate underwriting. Additionally, highly-valued IPOs are typically allocated to brokers’ premier clients, which tend to reward the biggest commissions.

Retail investors flooding the market trading meme stocks, such as GameStop early in the year in addition to multiple bouts of equity-market volatility due to Covid-19 mutations, vaccine updates and inflationary uncertainty also resulted in higher liquidity and execution feeds paid to brokers.

“The steady uptick of the markets, the growth of passive strategies and the lack of new IPOs has pressured the equity business for most of the last decade,” said Larry Tabb, Head of Market Structure Research for Bloomberg Intelligence. “Starting last year and accelerating into 2021, picking winners and access to the best IPOs has become more important than managing cost.”

Commission budgets, which in 2017 were nearly equally split between execution, i.e. trading and liquidity, and services, such as research, conferences, corporate access and market data had in the years since been skewed towards execution. In 2021 services saw a 2% increase in budget allocation to 42%. Large brokers allocated 29%, up from 21% to services this year representing a 38% jump. This may be attributed to increased fund cost pressures and a need to outperform peers with access to the best research available.

The BI study finds that buy-side broker services were driving the U.S. equities business in 2021. Services allocations were up 31%, due to several factors, including a full IPO calendar, flaky U.S. equity liquidity, staffing challenges, and the Covid-19 pandemic that has made the buy-side more dependent upon the sell side. Broker research, the largest component of broker services, and historically neglected by the largest buy-side firms, grew at 25% to $1.7 billion in 2021.

The buy-side for the first time in seven years dramatically expanded its list of brokers by 43% from an average of 23 to 33. This move mostly helps investors expand their ability to obtain diverse research ideas, access new offerings and tap into new liquidity sources. While adding brokers over the past decade has been rare, this year, across the board broker rolls increased as the demand for services expanded.

Institutional investors increased the number of algorithmic trading providers by 22% to almost 9 providers per investment firm. Seemingly insignificant, the difference between 9 or 11 providers can have a big impact with each provider generally offering between 4 and 6 different algorithms which can be customized depending upon the firm and use. Hence, as an example ten providers times five models means mastering 50 trading algorithms.

Buy-side traders were also are generally slow to return to the office, with 40% of respondents to the BI study in the office only once a week or not at all. Most companies in the sample have Covid-19 office mandates in place, but strategies are inconsistent. New-hire onboarding might require more face-to-face time.

The Bloomberg Intelligence ‘U.S. Institutional Equity Trading 2022’ study surveyed 103 head and senior buy-side equity traders on commissions, rates, services, brokers, technology, trading algorithms, and market structure issues, as well as working from home, return to office, the influx of retail investors and the trading of so-called meme-stocks. Interviewed funds tilted toward large funds (39%), with a slightly smaller sample of mid (28%) and smaller funds (33%). More asset managers (86%) were sampled as hedge funds only accounted for 14%. Outreach occurred from early October to mid-November 2021.

The full ‘U.S. Institutional Equity Trading 2022’ study, which has been published in over 10 parts, leading with four major trends pieces is available to Bloomberg Terminal subscribers via is {BI<GO>}. Findings will be presented in a webinar (register here) on Wednesday, December 15.

Contacts
Veronika Henze
Bloomberg Intelligence
+1-646-324-1596
vhenze@bloomberg.net

Samantha Boyd
Bloomberg Intelligence
+1-202-807-2150
sboyd49@bloomberg.net

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