The U.S. equity brokerage business has shrunk by nearly 40% since the global financial crisis, according to a new report from Greenwich Associates. In addition, the report finds trading commissions continue to migrate away from bulge bracket brokers towards midsize/regional brokers.
U.S. equities have been on a tear, with the S&P 500 increasing by 3.5 times since 2009. Against this backdrop, one might expect U.S. brokers to have benefited handsomely from the equity bull market. For the 12 months through Q1 2017, however, total U.S. equity commissions dropped 13%, from $9.7 billion to $8.4 billion. This latest drop leaves the total institutional equity wallet down 40% from its peak in 2009.
The new Greenwich Report, Brokers Adapt to Shrinking Equity Commissions, explains that a combination of factors has led to this decline:
- The steady appreciation of stock prices has meant that many asset managers see less need to turn over their portfolios; buy and hold has been an effective strategy
- Lower volatility has also contributed to lower turnover
- Equity assets in the U.S. have been shifting into passive funds—which generally turn over less frequently and execute at a lower commission rate
- Commission rates have also been trending down for most of this period
“Investors recognize the need to compensate their brokers for services like research and liquidity,” says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the report. “As a result, they continue to direct trading volume to higher-priced ‘high-touch’ trades executed through broker sales traders, which remains the dominant execution channel used by buy-side traders.”
Commission Rates Tick Higher
If there is one bright spot for equities brokers, it is that commission rates have stabilized and have even seen a slight bounce in the last couple of years. “Equity commissions had been on a steady decline ever since the abolition of fixed commissions in 1975, but that trend seems to be over,” says Richard Johnson. “With volumes remaining flat to down, there is no further room to accommodate rate reductions.”