Mid-tier brokers handling higher numbers of US equity trades

Mid-tier brokers handling higher numbers of US equity trades

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Mid-sized and regional brokers’ share of commission payments from institutional US equity trades is on the rise, according to a recent report from Greenwich Associates.

Back in 2007 stats show the nine leading “bulge-bracket” brokers captured 78% of commissions paid by institutional investors on trades of US stocks.

This year, they are claiming only 60%, down a full two percentage points from 2015.

Much of the lost share has flowed to mid-sized/regional dealers, Greenwich Associates claims, which as a group now take home 28% of US equity commissions, up from just 11% in 2007.

“In recent years, smaller firms have capitalised on the changes taking place in the industry, which is feeling the pain of a long-term contraction in the size of the trading commission pool overall,” says Greenwich Associates consultant David Stryker and author of the report, entitled 'Up for Grabs: Money in Motion in US Equities'.

Although the research shows that the overall US equity commission pool has remained relatively flat over the past three years, the current total of roughly $9.65bn is down more than 30% from its peak in 2009.

There is no evidence to suggest that the squeeze on brokers will ease anytime soon.

Greenwich Associates asked 321 traders in 2016 how they expected their use of specific brokers to change over the coming 6-12 months.

Forty-seven percent expect to cut back the share of commissions they allocate to at least one of their brokers, meaning that at least $100m of secondary cash equities commissions will be up for grabs.

Taken together, Stryker says is clear that brokers providing consistent and high-quality service stand to win.

The study results reveal that those sell-side firms that clients judge as providing “excellent” service typically earn an additional 100-200bps of commission share than those that clients rate as “above average.”

And a client typically allocates 100-200bps more to a broker it feels provides “above average” service than one that provides just “average” service.

“Brokers need to recognize that capturing commission share is increasingly a zero-sum game, and those who can outcompete their peers will best positioned to succeed,” adds Stryker.

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