Is the US equity institutional brokerage in sharp decline?

The US equity brokerage business has shrunk dramatically since 2008, while US equities have soared, finds a report from Greenwich Associates.

The Greenwich report found that equity commissions fell by 13 per cent, from $9.7 billion to $8.4 billion in the 12-month period to the first quarter of 2017, meaning that commissions since 2009 are down by 40 per cent.

This during a time when US equities increased rapidly – up 3.5-fold since 2009.

So why did this happen?

The report found that, “the steady appreciation of stock prices has meant that many asset managers have seen less need to turn over their portfolios; buy and hold has been an effective strategy, and so lower volatility has contributed to lower turnover.”

The report also found that equity assets in the US have been shifting into passive funds—which generally turn over less frequently and execute at a lower commission rate.

As a result of all of this, commission rates have also been trending down for most of this period.

“Investors recognise 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.”

There may be some good news in the offing, Greenwich found that commission rates have stabilised and have even seen a slight bounce in the last couple of years. Mr Johnson explained: “Equity commissions had been on a steady decline ever since the abolition of fixed commissions in 1975, but that trend seems to be over. With volumes remaining flat to down, there is no further room to accommodate rate reductions.”