Bulge Bracket U.S. Equity Brokers Fight To Defend Share in Shrinking Trading Market

Stamford, CT - 27 June 2013

  • Greenwich Associates Announces 2013 Greenwich Share and Quality Leaders
  • Bank of America Merrill Lynch Top Broker in Trading Volume; J.P. Morgan Leads in U.S. Equity Research
  • J.P. Morgan, Bernstein, and Morgan Stanley Are Tops in Research Quality

Bulge Bracket brokers are fighting hard to protect their aggregate market share in U.S. equity trading as a slowdown in institutional trading activity continues to erode the overall pool of commission revenues generated by sell-side firms.

The total amount of commissions paid to brokers by U. S. institutions on trades of domestic equities has decreased by about one-third over the past four years, falling to an annual $9.3 billion in the year ending Q1 2013 from $14 billion in 2009. Over the past 12 months alone, the U.S. commission pool contracted by 15%. This decline has sharply reduced broker trading revenues, leading to widespread cost cutting, including desk consolidation and headcount reductions.

“The major brokers have concluded that trading activity is unlikely to bounce back to pre-crisis levels,” says Greenwich Associates consultant Jay Bennett. “As a result, they are downsizing their own businesses to maintain profitability in an environment of lower trading volumes, fewer commissions and less revenue.”

In this increasingly difficult marketplace, Bank of America Merrill Lynch captured the lead spot among U.S. equity brokers with a 9.1% trading share in trading, followed by a group of closely matched brokers including Morgan Stanley, Credit Suisse, J.P. Morgan and Goldman Sachs, all with trading shares ranging from 8.1% to 8.4%. Among portfolio managers, J.P. Morgan captured the top spot in U.S. equity research with a 10.9% share of the institutional research vote—the process by which institutions determine which sell-side providers will be used and compensated. For coverage of U.S. Small- and Mid-Cap stocks, Robert W. Baird is the leader — taking the lead spot in research and advisory with a market penetration of 67% and is the Greenwich Quality Leader in both research and analyst service and sales.

Tension Between Research Demand and Trading Revenues

When it comes to U.S. equity research, Bulge Bracket brokers’ vote share has been steadily eroded over the past several years by gains made by smaller brokers and independent research providers. As recently as 2011, Bulge Bracket firms controlled about 64% of the institutional “research vote,” — the process by which institutions determine which sell-side providers will be used and compensated. By 2013, that share has fallen to 56.2%. Meanwhile, the research share of mid-sized, regional and sector specialist brokers increased to 37.3% in 2013 from 31.8% in 2012 and the share captured by independent research providers grew to 5.9% from 4.2%.

Over that same period, however, the Bulge Bracket’s share in equity trading was essentially unchanged at just over two-thirds. In the context of an overall commission pool that has been steadily and dramatically shrinking, these results show two things: 1) The decline in commissions has not yet forced institutions to retrench in terms of the research providers used in their investment processes, and 2) Brokers and research providers outside the Bulge Bracket are increasingly under pressure to capture what they view as adequate compensation for the research and services they are delivering.

Goldman Sachs is the 2013 Greenwich Quality Leader in U.S. Equity Trading, meaning that its institutional clients awarded the firm quality ratings in trading that exceeded those given to other brokers by a statistically significant margin. J.P. Morgan is the 2013 Greenwich Quality Leader in U.S. Equity Sales. In U.S. equity research and analyst service among portfolio managers, the title of 2013 Greenwich Quality Leader is shared by three firms: Sanford C. Bernstein, J.P. Morgan and Morgan Stanley. “Institutions view Bernstein as a premium provider of research and they rate the firm as such,” says Greenwich Associates consultant John Colon. “Among providers with a broader client base, J.P. Morgan and Morgan Stanley received the strongest quality ratings in 2013.”

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