Sell side braces for commission cuts in 2010
Jul 24, 2009
Analyst and management contact rank high on buy side’s wish list
A recent Greenwich Associates survey of 268 sell-side institutions projects that commissions generated in trading US equities in 2010 could shrink nearly 25 percent to 2007 levels of $10.5 bn. Underneath that overall decline, hedge fund commissions are projected to shrink by nearly a third. As a result, the battered ranks of sell-side analysts could shrink even further, according to the Greenwich report released earlier this month.
The survey also found that while hedge funds aggressively cut back on analyst staffing in 2009, traditional buy-side firms held their analyst levels roughly flat.
An increasing percentage of available commission dollars is being allocated to research and advisory services and away from trading and execution, reversing a trend over previous years. Research and related services make up an estimated 56 percent of total commissions in 2009, up from 48 percent in 2008, while trading and execution dropped to 33 percent in 2009 from 39 percent in 2008.
However, the demand from institutional clients is increasingly biased toward direct analyst and management contact, the top two categories of research dollar allocation, while written research on individual companies ranks fifth.
Cost-conscious buy-side institutions are driving the shrinking commission dollars. After a sell-off-driven surge in 2008 and a market rebound in 2009 drove commissions to an estimated $12.2 bn and $13.7 bn respectively, a continued shift to electronic trading promises to cut ‘high-touch’ trading back to 2007 levels in the coming year. Algorithmic trading strategies rose to 18 percent of total volume in 2008-2009, up from 13 percent in the 2007-2008 period. Execution-only commissions average 1.6 cents per share in 2009 compared with four cents per share for high-touch trades.
The proportion of commission dollars allocated to research by US institutions is coming back in line with their European brethren. ‘For several years we had watched institutions in the United States direct a growing share of commissions to trade execution while their counterparts in Europe maintained a much larger allocation to research and advisory services,’ Greenwich Associates consultant John Feng reports in the study. ‘After the big swing last year, US commission allocations are now quite similar to those in Europe.’
Don De Laria, VP of investor relations at Regal Entertainment Group in Knoxville, Tennessee, sees continued shrinkage of the sell side as a good thing. He’d like to see fewer analysts than the 19 who currently follow Regal. ‘I hope it happens. It would be a good thing if we had fewer analysts who take the time to understand the business better and build better financial models,’ he says.
John Schoger, co-founder and president of Voyager Institutional Services, is benefiting from cutbacks on the sell side. His non-deal roadshow business focused on the Midwest continues to do well. ‘I’m getting a bigger share of the pie,’ he observes, adding that he does not see any ‘pressure on my business.’ In fact, he’s confident enough in the growing appetite for management access that he recently expanded into Minneapolis and Kansas City from his Ohio Valley base.
By Brad Allen