U.S. equity brokers say the pool of equity commission dollars they earn on institutional trades of domestic equities could contract by nearly 25% in 2009 a reduction that could prove problematic for sell-side firms and institutional investors alike.
From 2008 to 2009, the amount of commissions paid by U.S. institutions to equity brokers on trades of domestic stocks grew 12% to $13.7 billion, according to the results of the latest Greenwich Associates U.S. Equity Investors Study. However, earlier this year sell-side firms projected a decline of 23% in overall U.S. equity commission revenues for calendar year 2009, with an even more severe 32% contraction expected in hedge fund commission payments. The end result: a possible fall in total domestic equity commissions back to 2007 levels.
Last years surge in equity brokerage commissions was driven in part by the forced sell-off of U.S. stocks, which represented one of the few sources of liquidity for institutions in need of funds to cover deteriorating positions in fixed income and other areas of their portfolios. Also contributing to the historic trading volumes was hedge fund deleveraging a process that appears to have largely run its course.
While the rebound in U.S. stock prices in the second quarter is likely to mitigate the resulting decline in commission payments, says Greenwich Associates consultant Jay Bennett, any significant reduction will be a challenge for brokers that are counting on client-driven capital markets businesses for revenues following the collapse of mortgage and sub-prime businesses.
By increasing the pressure on broker-dealers, the decline in commission revenues could result in cutbacks on sell-side equity sales coverage and research/advisory services. These reductions would come at a difficult time for U.S. institutions, which are still coming to terms with huge declines in portfolio asset values and in many cases are looking to outsource aspects of their investment and trading functions to the sell-side as part of their own ongoing cost-cutting efforts.
D.C.