Hedge funds fuel growth of equity trading commissions

Date: Friday, July 18, 2008
Author: James Langton, Investment Executive

Hedge funds continue to play a big role in driving the growth of U.S. equity trading commissions, according to new research from Greenwich Associates.

The commissions paid by the typical U.S. institution increased to just more than US$26 million in 2007-2008 from roughly US$24.7 million in 2006-2007. Powering much of this commission growth were hedge funds, Greenwich said, as they generated nearly 30% of U.S. institutional equity commission payments in the year ending February 2008, up from 24% in the prior year.

“Although the second half of 2007 was something of a wild ride, hedge fund performance for the year was relatively strong, and from a U.S. equity trading perspective, hedge funds were extremely active,” says Greenwich Associates consultant John Feng. “When you include the business from the new hedge funds added to our research universe from 2007 to 2008, hedge fund commission payments on U.S. equity trades increased more than 45%.”

Meanwhile, equity commission payments by traditional investment managers increased by nearly 30% year over year and now account for some 47% of the market-wide total. Meanwhile, mutual fund commission payments declined for at least the third consecutive year, dropping by roughly 19% from 2007 to 2008 after slipping almost 10% the prior year.

Greenwich reported that the increasing influence of hedge funds as a generator of U.S. equity trading business has helped Merrill Lynch and several other firms solidify their positions as leading U.S. brokers in terms of market share in institutional trading.

Its research reveals that across the entire U.S. equity market, Merrill Lynch and Lehman Brothers have built the biggest trading franchises, with market shares between 8-9%. Goldman Sachs, Credit Suisse, Morgan Stanley, and Citi are close behind in the 7-8% range, and UBS leads the next tier at mid-6% share.

In terms of U.S. equity research/advisory, a total of four brokers — Merrill Lynch, Citi, Goldman Sachs, and Morgan Stanley — have achieved a commission-weighted research/advisory share of close to 9% or higher. Bernstein ranks 5th with just over 7% share, it noted.

U.S. institutions give the highest ratings for overall sales trading & trading quality to Merrill Lynch and Lehman Brothers, Greenwich said. The next tier is led by Credit Suisse and Morgan Stanley.

The firm said that the competitive landscape changes significantly when the analysis is restricted to only the biggest and most actively trading U.S. institutions — a group in which hedge funds play a prominent role. Among this market segment, Merrill Lynch and Morgan Stanley jointly rate at the top of the rankings in terms of quality ratings for trading awarded by institutions in this group. “Comparing results from the broad market with those from these ‘priority’ institutions, Credit Suisse and Goldman Sachs also appear to be doing a very good job among the bigger and more active institutions in the U.S. equity market,” says Greenwich Associates consultant Jay Bennett.