Portfolio Trading Accounts for 40% of Institutional Share Trading Volume

July 28, 2003 (PLANSPONSOR.com) - The average institution's portfolio-trading volume increased nearly 10% from $7.6 billion in 2002 to $8.3 billion in 2003.

With the increase, portfolio trading at 108 of the largest institutional investors in North America now accounts for more than 40% of share trading volume.   Portfolio trading is not just limited to domestic shares either, as North American institutions are also expanding its scope to international shares, according to a study conducted by Greenwich Associates.

In fact, the volume of portfolio trading in stocks in the United Kingdom and continental European among US and Canadian-based fundshas nearly doubled over the past year – from 9% of volume in 2002 to 16%in 2003.   Corresponding volumes in the Asia-Pacific area are also up by 50% – from 4% to 6% of share volume.

Cost Basis

Greenwich consultant John Colon notes that institutions see portfolio trading as a cost-effective method to transform their exposure in different markets and individual stocks. “At 2.5 cents/share, often 2.2 cents/sharefor the largest users, the cost is less than half of what they normallypay for US agency trades or European basis-point transactions.”   Earlier Greenwich showed those lower commission rates for European transactions to be in the neighborhood of 12 to 15 basis points (See  New Tools Trim Trading Costs ).

Additionally, new technology is also making portfoliotrading a more proficient resource for many institutions to do their share transactions. Two-thirds of all institutions are using “direct access” systems forportfolio trading, and while the proportion of their business done thisway remains steady at around 35%, indications are that the volumes beingtraded in such a way are growing on an individual as well as collectivebasis, according to Greenwich.

However, interest in portfolio trading on a risk basis remains stagnant.   Among domestic portfolio trading, the proportion done on a risk basis is steady at 25%.   For international portfolios, trading done on this basis has declined to 18%, from 23% in 2002.

Compensation Increase

Overall, the total cash compensation – salary and bonus – of portfolio managers and traders that actively use portfolio trading was up.   Portfolio traders, on average, reported a 5% increase in total cashcompensation between those years, to $185,000 from $175,000. Likewise, trader total compensation went to $215,000 from $205,000.

This stands in contrast to earlier Greenwich studies that showed equity portfolio manager compensation, both domestic and international, was down (See  Portfolio Manager Pay Down, Traders’ Pay Up ).   However, the same study also revealed a bump in equity trader total compensation that was identical to portfolio traders.  

The report was compiled based on interviews conducted from January to March, 2003 by Greenwich Associates with 108 institutions in the United States and Canada, includinginvestment management firms, quantitative funds, hedge funds, andpension funds. Interview topics included market trends, service providerassessments, and compensation.