By Flora McFarlane.
Analyst firm Greenwich Associates has found that US equity brokerage market business has shrunk by nearly 40% since 2009. Despite the S&P 500 growing by three and a half times in the equity bull market since 2009, the effects of the boom in equity valuations have not been felt by brokers.
According to its recent study ‘Brokers Adapt to Shrinking Equity Commissions’, between Q1 2016 and Q1 2017, total US equity commissions dropped 13%, from US$9.7 billion to US$8.4 billion, contributing to the total 40% decline in the equity brokerage business.
The report, suggests that a combination of factors has led to the drop:
- The steady increase in stock prices has led to asset managers favouring a buy and hold strategy;
- Lower volatility contributing to lower turnover
- Equity assets in the U.S. have been shifting into passive funds, generally turning over less frequently with lower commission rates;
- A downwards trend in commission rates for most of the period
Commission rates, which had been on a steady decline since the abolition of fixed commissions in 1975, however, have stabilised and even been on the up over the past few years.
“Investors recognise the need to compensate their brokers for services like research and liquidity,” said Richard Johnson, author and vice president of market structure and technology at Greenwich Associates. “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.”