European fund managers believe they are paying more for research than traders, says a Greenwich Associates study of
the European equity investing market.
They told Greenwich researchers that they believe a much higher proportion of their total commissions are applied for research than traders. The consultancy describes this as “a fundamental disconnect that, along with an overall decline in equity commissions in 2003, may well be changing how business is conducted in this market. “
“This may cause some brokers, including some key brokers, to direct more business toward trading and to cut back the research and sales services which they provide to institutions,” adds Greenwich Associates consultant John Colon.
If institutional traders are right about the percentage of commissions they are disbursing for research and the percentage they are disbursing for trading coverage, their importance to brokers is potentially 4-5 times greater than that of portfolio managers.
“When brokerage firms analyze the productivity of their coverage efforts, they frequently find it far more profitable to direct these efforts at institutional traders than at portfolio managers and analysts,” notes consultant Jay Bennett.
This disparity is particularly acute with United Kingdom institutions, where traders’ importance to brokers is as much as 8.2 times higher than portfolio managers and analysts, and among all European institutions that have annual European equity commission flows of over 20 million euros, where the ratio is 7.2.
European institutions are also paying brokers less in commissions. Commission rates are reported to be dropping across most share types. Large cap pan-European shares on average fell from 21 to 18 basis points, U.K. shares fell from 15 to 14 basis points, and U.S. listed stocks dropped from 20 basis points to 19.
Increased use of portfolio trading is one reason for the decline. 77% of European institutional investors trading European shares report doing so via portfolio trading, and these institutions say portfolio trading accounts for 29% of their total volume. The average rate paid on these trades is between 7-9 bps, providing institutions considerable cost savings.
Another reason is electronic and direct access trading, where the average commission rates falls in the area of 12 basis points, and new technology permits online traders to exert incremental control. 65% of institutions trading pan-European equities utilize electronic brokerage or direct access systems, and trade 31% of their total volume this way.
From January to March, 2003, Greenwich Associates interviewed 939 portfolio managers and 222 traders at predominately European institutions about the trading services they receive from their equity dealers. These portfolio managers and traders were also asked about current market practices, trends, and compensation. Institutions where these interviews took place were located in the following countries: Austria, Australia, Belgium, Denmark, France, Germany, Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Poland, Singapore, Spain, Sweden, Switzerland, the United Arab Emirates, the United Kingdom, and the United States.