05.31.2018
By John D'Antona

Brokerage Commissions Down for Eighth Year

When will this end?

U.S. equity brokerage commissions have fallen again this last year – marking the eighth straight year of falling profits. Traders both on the sell-side and buy-side are not surprised as the underlying fundamentals surrounding trading haven’t changed much since 2009 – lower volumes, low volatility, more low-touch or electronic trading versus high-touch methods and a reduced spend on research.

In what was once hoped would be a short-term slump in commissions has become a more prolonged depression. It truly isn’t a good time to a broker these days.

In its latest report, Greenwich Associates reported that U.S. equity commission payments from institutional investors to brokers have fallen a whopping 45% from their peak levels. Those numbers from the Greenwich Associates 2018 U.S. Equity Investors Study illustrate the difficult environment faced by U.S. equity brokers. The persistent declines in broker commission revenues, which have long been attributed to decreased trading activity and lower portfolio turnover among investors, have also been driven by two additional factors, the consultancy wrote.

First, institutional investors—especially the largest institutions, continue to shift their U.S. equity trades from “high touch” trades using broker sales traders to “low touch” algorithmic and other, much lower-cost, electronic trades. And in some instances, the usage of artificial intelligence on the buy-side trading desk also keeps spending in check.

Dan Royal, Global Head of Equity Trading for Janus Henderson, recently talked to Traders Magazine’s sister publication Markets Media about the increased usage of technology as a means to make his desk, and others, more efficient.

“What has changed is the automation and the technological boom in our industry. The pace of transactions and dissemination of information occur at inconceivable speeds. Moving from paper tickets and open outcry trading environments to electronic communication and automation, has truly been revolutionary,” Royal said. “I feel we’re at the cusp of significant shifts in the institutional trading space, where automation and artificial intelligence really integrate into our workflow.”

And this is just the start. The future looks even more bleak for the brokers – especially those that focus on high-touch executions.

I think a big theme is that automation really starts to ramp up in terms of finding its way onto institutional trading desks. Also, automation backing up into the portfolio manager and into the back office — pretty much throughout the entire ecosystem of equity trading — is probably something we’ll see over the next several years,” Royal said. “Also, it is inevitable that at some point artificial intelligence will supplement, and potentially sometimes replace, human input when it comes to liquidity capture. I think that makes us more efficient.

Adam Sussman, Head of Market Structure and Liquidity Partnerships at Liquidnet, said that one of the reasons commissions are down is because the buy side is becoming more self-reliant. The phrase ‘Low touch’ can be misleading, he added.

Adam Sussman, Liquidnet

Adam Sussman, Liquidnet

“The value of high touch services has not diminished, but the buy-side trader has trading tools and analytics that are displacing the traditional sales trader,” Sussman said. “That’s why we keep hearing about Systematic Internalizers and CRBs – it’s one of the last ways the bulge brackets can truly differentiate.”

Second, for the past two years, institutions have reduced the amount of broker commissions used to pay for U.S. equity research. This is in part due to an increased focus on research costs, triggered by the MiFID II regulations in Europe.

“Looking forward, the buy side expects to reduce reliance on investment bank research even further, looking instead to boutique research firms and emerging technology-driven solutions,” said Richard Johnson, Vice President of Greenwich Associates Market Structure and Technology and author of the new report Low-Touch Trading Grows as Commission Wallet Shrinks. “These changes will certainly not alleviate the pressure on bank equity trading revenues.”

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