Greenwich: Alternative Transaction Styles Eat Away At Commission Rates

Institutions have discovered that transaction costs for electronic and portfolio trading average around 12 to 15 basis points lower than the traditional brokerage driven transaction.   The biggest change has been seen in the 63% of US institutions trading European shares now employing portfoliotrading, up from 56% a year ago, a figure that accounts for 19% of eachinstitution’s total volume. Additionally, almost half of institutions tradingAsian-Pacific shares use portfolio trading as well, at similar levels, according to data reported by Greenwich Associates.

The trend continues in electronic brokerage services, where 51% of US institutions trading European shares trade via electronicbrokerage services, as do 20% of US institutions trading Asia-Pacificshares, and they conduct between 4% and 6% of their business this way.

On the sell-side, a decline in equitycommissions is forcing greater pressure to service the buy-side for lessreward, much the same as the dilemma faced by US portfolio managers (See  Money Manager Dilemma: Revenue Down, Service Expectations Up ).   Commission rate declines have been seen in nearly every share type tracked by Greenwich Associates on a basis point (bps) scale from 2002 to 2003:

• Hong Kong shares –   rates fell to 28 bps from 30 bps
• Japanese shares – rates fell to 19 bps from 20 bps
• Latin American shares – rates fell to 29 bps from 32 bps .

This decline in international equity commission trade rates follows a very similar path seen in the United States, where the average commission rate dropped in 2003 to 4.6 cents/share on thelisted market, and 4.5 cents/share for NASDAQ from 2002’s rates of 5.1 cents/share and 4.9cents/share, respectively.

Institutional professionals are standing up and taking notice to commission allocation and one result of this is the aforementioned dichotomy between theproportion of commissions that portfolio managers believe are beingspent on services such as equity research, and the proportion traderssay are in fact being paid for these services. In reality, the difference is about10% of the total in European shares, and is nearer to 20% in Japaneseand Asian shares.

Compensation Trends

Taking a bit of a hit for the decline is the total cash compensation – salary and bonus – of international equity portfolio managers.    Overall, total cash compensation was down between 2001 and 2002, to an average salary and cashbonus totaling $313,000 in 2002, down from $330,000 in 2002. Bonuses, orexpected bonuses, averaged $140,000 in 2002, down nearly 15% from$160,000 in 2001.   By comparison, US equity portfolio managers’ total cash compensation was also down, to $566,000 in 2002 from $572,000 in 2001.

However, international equity traders’ total cash compensation was up during the same period, to $215,000 in 2002 from $200,000 in 2001. Further, bonuses were up 17% to $90,000 from just $77,000 in 2001. By comparison, US equity traders’ total cash compensation increased by nearly 4% to $262,000 in 2002 on average salary rising 6% to $148,000 in 2002.

Greenwich Associates interviewed 303 equity portfolio managers andtraders at 199 US institutions about the international research andtrading services they receive from their brokers. They were also askedabout current market practices, trends, and compensation. Interviewswere conducted from December 2002 to February 2003.