Contributing to the gains is a growing use of electronic brokerage systems and portfolio trading, which offer commission rates that are around one-third to one-half less than those for typical agency transactions, averaging around 12 to 15 bps, according to Greenwich Associates. Nearly two-thirds (63%) of US institutions trading European shares employ portfolio trading, up from 56% a year ago, and this accounts for 19% of each institution’s total volume. Nearly half of institutions trading Asian-Pacific shares use portfolio trading as well, according to Greenwich.
Greenwich notes that 51% of US institutions trading European shares trade via electronic brokerage services, as do 20% of US institutions trading Asia-Pacific shares – a combination that adds up to 4-6% of their business. “Volumes are lower with electronic trading, but if U.S. domestic trading activity is any indication, that should rise significantly and soon,” according to consultant John Feng.
Commission rate declines have been seen in nearly every share type tracked by Greenwich Associates. In Hong Kong shares, for example, commission rates fell from 30 basis points (bps) in 2002 to 28 bps in 2003, while Japanese share commission rates are down to 19 bps from 20 bps. Latin American shares saw commission rates fall from 32 bps to 29 bps.
Greenwich says that institutional professionals are paying a “great deal of attention” to commission allocation these days. One result? What Greenwich describes as a “dichotomy” between the proportion of commissions that portfolio managers believe are being spent on services such as equity research, and how much traders say are in fact being paid for these services.
That difference is about 10% of the total in European shares, and is nearer to 20% in Japanese and Asian shares, according to Greenwich.