Wednesday, October 19, 2016 Stamford, CT USA — Depressed trading volumes in U.S. equities are making brokers more willing to accept payments through commission management programs (CMPs) in which they are not the executing broker. That growing acceptance is helping push CMP usage to record levels.   

CMPs are arrangements that allow institutional equity investors to pay for research and other services by instructing executing brokers on trades to direct a portion of trading commissions to third-party providers. 

While institutional investors are relying on CMPs to help them navigate market and regulatory pressures, brokers historically have resisted the role of a third-party research provider that accepts payments from executing brokers. Sells-side firms—especially large brokers with well-equipped trading desks—strongly encouraged institutional clients to pay for research directly with trading business that generates commission payments. 

“Given the industry-wide drop in trading business, brokers today can’t afford to be so picky,” says Richard Johnson, Vice President Market Structure and Technology at Greenwich Associates and co-author of a new report Commission Management Programs Remain Key in U.S. Equity Trading.

Brokers’ new willingness to accept payments from these arrangements has helped boost CMPs, which had previously stalled out in terms of growth. The proportion of U.S. equity trade commissions directed through CMPs users increased to 36% in 2016 from 34% in 2015. From 2011-2014, volume executed via CMPs had plateaued at 32% of overall volume, so the growth over the last two years is a significant new trend.

Larger institutional investors are the heaviest users of CMPs. Among institutions with more than $20 billion in assets under management, 42% of commissions on U.S. equity trades are paid via CMPs, up from 35% in 2015. Among these big institutions, the proportion of CMP monies used to pay other, non-executing brokers for research and other services has almost doubled. 

At the other end of the spectrum, small institutional investors have actually reduced the amount of commissions routed through CMPs. “This trend reflects the new dynamics of the buy-side/sell-side relationship,” says Kevin Kozlowski, Greenwich Associates Institutional Analyst and co-author of the report. “Larger accounts are able to take more control over their order flow and increasingly break the bonds between research and trading, while smaller firms need to concentrate business with a few brokers in order to remain important clients and protect their access to broker coverage.”

Looking ahead, Greenwich Associates expects institutional use of CMP “aggregators,” which has been on the rise for the past five years, to continue expanding. More broadly, upcoming MiFID II regulations around unbundling in Europe will likely lead to a knock-on effect in the United States and further increases in CMP usage.