Knowledge is power – but don’t make me pay for it. That pretty much sums up the business of providing research these days. Average bundled commissions paid to brokers for services such as executing trades and providing research have dropped to less than 3.2 cents per share, according to Greenwich Associates. They averaged 5 cents at the start of the decade.
That partly reflects a drop in the cost of executing trades as more volume shifts to electronic platforms and portfolio trading. Indeed, the latter’s share of overall US equity trading volume is expected to rise from 37 per cent now to 50 per cent in 2010. If cheaper trading costs lie behind the fall in commissions, then perhaps research is holding its own, relatively speaking.
Ultimately, though, such a trend does not work in favour of traditional research. Less “high touch” trading means lower commissions in aggregate. The overall amount paid to US equity brokerages fell to $10.3bn in the 12 months ending March 2007, down from $12bn in 2001.
That means rethinking the role of research – and its core clients. While mutual funds are slashing the proportion of commissions allocated to research, hedge funds are boosting it. That makes sense: the latter value short-term trading ideas more highly. Yet they also want services other than plain vanilla research, such as introductions to company executives.
That is a problem for smaller independent research houses, which might struggle to provide such time and manpower intensive services. There are models that appear to work – look at Gerson Lehrman’s expert network business. Overall, though, aggregate commissions paid to independents were $750m in the year to January 2007, down almost 5 per cent year-on-year. Like their full-service peers, the independents are competing for a shrinking prize.