A new report from Greenwich Associates sheds light on the process used by institutional investors to determine which U.S. equity research and providers and brokers they will use and, perhaps more importantly, how much compensation these providers will receive in the form of brokerage commission payments.

This process has become critically important to brokers and investors alike as the trading slowdown and other factors shrink the overall U.S. commission pool and U.S. institutions cut back on the number of providers used for domestic equity research, advisory services and trade execution, according to the report, entitled “Buy-Side Institutions Rely on Broker Vote in a Constrained Commission Environment.”

Reductions in the number of providers used by institutions in U.S. equities are the result of two factors: First, because trading volumes and institutional equity brokerage commission payments remain depressed, institutions have less need and less ability to support long lists of research providers and executing brokers. At the same time, the sell side has been forced to reduce the research advisory and trading services it offers in order to maximize the limited profits from their equity businesses.

As they pare back on their lists of brokers and providers, most institutions rely on the so-called “broker vote” to determine which firms to keep, and ultimately, how their research and advisory service dollars will be apportioned. Through the broker-vote process, portfolio managers and traders score brokers and providers on the services they provide—such as research conferences, one-on-one meetings, access to liquidity, and best algorithms.

This new Greenwich Associates report presents the results of interviews with 157 institutional investors. Among the findings:
• The head of research runs the broker vote at 27% of institutions; the head trader runs the process for 20 of institutions. About 30% of biggest institutional investors in the United States employ broker liaisons that run the broker vote.
• Institutions track numerous broker services but the most common include track one-on-one company meetings (82%) and analyst visits (68%). About 58% of institutions track invitations to conferences and 48% track new issue allocation.

“It is important to understand how these ‘broker votes’ operate, because in the current environment, the process is emerging as a critical tool not only in helping value research advisory and trading services, but also for reconciling the different service needs of portfolio managers and traders with limited commission dollars to spend,” says Greenwich Associates Analyst Kevin Kozlowski.