10.21.2019
By Rob Daly

Buy Side Won’t Benefit from Retail Commission Drop

Within a matter of weeks, Interactive Brokers, Charles Schwab, E*Trade, Fidelity, and TD Ameritrade eliminated equities trading commissions for their retail clients, but experts doubt that similar actions are in store for their institutional clients.

Changes might be in the wind regarding institutional commission rates, but details remain uncertain.

Market participants note a broad trend toward compression in retail commissions, as well as a commoditization in institutional low-touch trading. But brokers are raising the bar on high touch, which most likely will never be free.

The sell side’s institutional business cannot be viewed as a scaled version of its retail business, said Larry Tabb, co-founder and research chairman of Tabb Group, on a recent webinar.

The sell side also generates revenue from payment for order flow and through securities lending as well as their trading commissions. Institutional clients, however, typically do not have their institutional brokers hold their assets in custody, which leaves the sell side with fewer ways to generate revenue from institutional transactions.

Larry Tabb,
Tabb Group

“The payment for order flow really only works with small retail-type orders,” said Tabb. “If the order size were larger, you would be asking the wholesalers to eat a tremendous amount of losses. I cannot imagine that they would do that.”

The move away from collecting retail equities commission will put additional stress on the sell side’s other retail revenue channels like payment for order flow, which in turn will put more pressure on their trading infrastructure as well, according to Joe Lichtenberg, director, product marketing at InterSystems and whose firm sponsored the webinar.

“The thing I noted about the Fidelity announcement the other week was that they said they were removing fees on the online equity trading, but they are doing that without taking payment for order flow,” he said. “What that means to me is that you have to match what the competition is doing in terms of having very fast trade execution.”

Firms could rip-and-replace their existing trading infrastructure to improve their performance, but it tends to be an expensive proposition, he added. “What we see more and more is that companies look to augment what they already have. They are looking to augment their current tech stack, and not do a rip-and-replace massive scale-out. It has to be cost effective and it has to be non-disruptive to their current infrastructure and their current investment.”

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