U.S. Equity Brokerage Commissions Down for Eighth Straight Year

When will this end?

U.S. equity brokerage commissions have fallen again this last year – marking the eighth straight year of falling profits. Traders both on the sell-side and buy-side are not surprised as the underlying fundamentals surrounding trading haven’t changed much since 2009 – lower volumes, low volatility, more low-touch or electronic trading versus high-touch methods and a reduced spend on research.

In what was once hoped would be a short-term slump in commissions has become a more prolonged depression. It truly isn’t a good time to a broker these days.

In its latest report, Greenwich Associates reported that U.S. equity commission payments from institutional investors to brokers have fallen a whopping 45% from their peak levels. Those numbers from the Greenwich Associates 2018 U.S. Equity Investors Study illustrate the difficult environment faced by U.S. equity brokers. The persistent declines in broker commission revenues, which have long been attributed to decreased trading activity and lower portfolio turnover among investors, have also been driven by two additional factors, the consultancy wrote.

First, institutional investors—especially the largest institutions, continue to shift their U.S. equity trades from “high touch” trades using broker sales traders to “low touch” algorithmic and other, much lower-cost, electronic trades. And in some instances, the usage of artificial intelligence on the buy-side trading desk also keeps spending in check.

Dan Royal

Dan Royal, Global Head of Equity Trading for Janus Henderson, recently talked to Traders Magazine’s sister publication Markets Media about the increased usage of technology as a means to make his desk, and others, more efficient.

“What has changed is the automation and the technological boom in our industry. The pace of transactions and dissemination of information occur at inconceivable speeds. Moving from paper tickets and open outcry trading environments to electronic communication and automation, has truly been revolutionary,” Royal said. “I feel we’re at the cusp of significant shifts in the institutional trading space, where automation and artificial intelligence really integrate into our workflow.”

And this is just the start. The future looks even more bleak for the brokers – especially those that focus on high-touch executions.