August 23, 2022 | Stamford, CT — The pool of commissions paid by institutional investors for U.S. equity trades declined from Q1 2021 to Q1 2022, returning to the long-term contraction trend that has driven these payments to historic lows and resuming pressure on an important source of brokerage revenues.
Equity brokers collected about $6.62 billion in commissions on U.S. equity trades in the first quarter of this year, down from more than $7 billion in Q1 2021. “After some encouraging growth last year, the commission pool resumed its downward trend in 2022 as the bear market settled in, pushing toward what could be a new full-year low,” says Shane Swanson, Senior Analyst in the Market Structure & Technology practice at Coalition Greenwich and author of Equity Hedge Funds Shift Commission Spending as Volatility Settles In. 

Fewer Brokers, Lower Rates
Buy-side trading desks last year also continued a long process of reducing their counterparty trading lists, meaning they are cutting back on the number of brokers with whom they trade. Also on the decline was the average all-in commission rate paid by institutions on U.S. equity trades, which has been falling for decades. 
“When we consider these two factors together, it can be seen as a very thin silver lining—although the commission dollars have continued to decline, the pool of recipients has also shrunk, meaning that absolute dollars in play haven’t fallen as precipitously as otherwise would have been the case,” explains Shane Swanson. “That said, there is no doubt that these remain among the most challenging times for brokers competing for the precious commission pool dollars.”

What’s Driving Commission Flows?
The buy side uses the majority of these commission payments to pay for a combination of research, advisory services, sales coverage, and corporate access. For hedge funds, payments for these services make up 63% of all commission payments, up from 61% in 2021. Traditional long-only investors use a smaller 51% of these payments for research and related services, devoting a bigger share of their commissions to compensating brokers for sales trading and trade execution.
One of the biggest drivers of buy-side commission allocations is access to corporate management teams. Overall, more than a quarter of all commissions used for research and related services are used to compensate the sell side for facilitating direct access to companies’ management. Another 17% is used to compensate brokers for invitations to research conferences and industry seminars at which investors have opportunities to interact with corporate management teams. “As lockdowns faded and some sort of normalcy began to reassert itself, these events began to regain their importance,” says Shane Swanson. “We expect this trend to continue in earnest heading into 2023.”