Institutional brokerage commissions set to shrink by nearly 25% this year. Fee-only advisors who cast envious glances at their commission-based rivals as clients scrambled to rebalance their portfolios in recent months may take a measure of consolation from a prediction by Greenwich Associates. The Stamford, Conn.-based consultancy says that sell-side firms will see a 23% drop in revenue derived from equity trades for 2009 and a 32% slide in hedge-fund commissions. Rather than auguring especially well for non-commission businesses, however, this reduction in commission sales could result in cutbacks on research and other vital services at a time when investors are most in need of them.

Commissions paid by U.S. institutions to equity brokers for domestic-stock trades between February 2008 and February 2009 increased 12% to $13.7 billion. But a decline this like the one Greenwich envisions could lead to contraction just as Wall Street starts to show signs of life -- ironically enough, as a direct result of increased trading activity in the first quarter of 2009.

Pressure points

"Any significant reduction [in commission revenue] 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," says Greenwich Associates consultant Jay Bennett.

The recent increase in equity-brokerage commissions -- the result of a large-scale sell-off of U.S. stocks -- was a welcome source of liquidity for institutions hard pressed to cover weakening positions in other areas. But trading activity has leveled off since the frenzy of late 2008 and early 2009 -- just as the process of unwinding hedge-fund positions seems to have slowed.

In addition to these organic contributions to the projected slowdown in commission sales, U.S. institutions that have been battered by asset-value erosion are moving from "high-touch" broker-facilitated trades to comparatively inexpensive electronic-execution platforms, according to Greenwich Associates. Although "all-in" blended commission rates for institutional clients have declined from 3.2 cents a trade in 2008 to 2.9 cents a trade now, an execution-only e-trade goes for about 1.6 cents a trade.

The proportion of overall U.S. institutional equity trading volume executed through high-touch trades slipped to 56% in the period covered in the Greenwich Associates' study from 60% in February 2007 through February 2008. The share of volume directed to e-platforms meanwhile increased to 36% from 32%.

As sellsiders reduce research and other advisory services to save money -- at a time when institutions are looking to outsource parts of their investment and trading functions to brokerages in cost-cutting efforts of their own -- these reductions could result in capacity constraints for buyside traders.

Institutions expect to increase the share of their total trading volume executed electronically from the current 36% to 41% by 2012. Instead of preparing for this by hiring more traders, however, they're planning to reduce trader headcount.

With this in view, Greenwich Associates consultant John Colon warns that institutions have to careful not to eliminate traders too aggressively.

"Shifting trading volumes to electronic platforms can reduce trading costs, but it also increases the work-flow pressure on the institution's trading desk," says Colon. "The shift also reduces the amount of commissions that the institution has available to obtain support from the sell-side in the form of sales coverage and [research and advisory] services." -FWR

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