US sell-side takes hit as investors cut spending
US brokers are cutting back on headcount, consolidating trading desks, scaling back coverage and reducing the level of resources devoted to US equities, with smaller brokers feeling the strain most, according to a new study by research firm Greenwich Associates.
Commission payments made by US institutional investors to brokers on domestic equities trades declined 6% from Q1 2011 to Q1 this year, according to the results of Greenwich Associates' 2012 US equity investors study. The decline helped push institutional spending on sell-side equity research and advisory services down to US$6.2 billion for the 12 months to the end of Q1 2012, down from US$6.8 billion in the previous period.
The results represent the third consecutive year the pool of institutional brokerage commission payments has contracted, and the lowest expenditure (US$10.86 billion) recorded since 2007. At the same time, the share of equity brokerage commissions allocated by long-term investors to research and advice increased to 56% in Q1 this year versus 55% the same period last year.
“Last year’s decline caught the buy-side by surprise – institutions in Q1 2011 predicted that the commission pool would expand by 8% into 2012,” said John Feng, consultant at Greenwich Associates. “The unexpected shortfall is complicating life for institutions who find themselves short of the commission dollars they expected to use to pay for research and other critical sell-side services. It also puts real pressure on brokers who are falling short of revenue expectations.”
A quarter of large institutional investors interviewed by Greenwich said they planned to make significant reductions to their active domestic equity allocations by 2014 and 16% planned sizable reductions in passive US equity allocations – suggesting that US equity commission pools will continue to shrink. Only 3-4% of institutions planned significant increases.
“The bottom line is that the entire industry – investors, brokers and other equity research providers – should be preparing to operate in an environment in which there are fewer commission dollars to spend,” said Jay Bennet, consultant, Greenwich Associates. “The sell-side is already moving to adjust their businesses to this new reality.”
US equity market volume by turnover was US$4.720 trillion in May this year, virtually unchanged from US$4.742 trillion this time last year. However, the latter part of 2011 witnessed a decline, as volumes fell from a high of US$7.285 trillion in August to a low of US$3.750 trillion in December.