People look at a stock index board outside a brokerage in Tokyo January 30, 2013.Toru Hanai/Reuters
After consecutive years of watching the pool of commissions shrink, portfolio managers expect to pay brokerages a little more this year. But for firms that have not invested in research, it may be hard to get a share of that increase.
The Canadian portfolio managers surveyed by Greenwich Associates said they expect the commission pool for brokerages to rise about 4 per cent in 2014, Greenwich consultant Jay Bennett said in an interview. That would come after two brutal years of double-digit percentage declines, and would provide a little stability.
The caveat here is that the institutions that pay commissions are not always the best forecasters. Last year they expected the commission pool to be up a few per cent. It ended up down 12 per cent.
If there is an increase in the commission pool, not all firms are likely to benefit equally. The push from institutions to cut high-touch commissions can't go much further.
"The negotiation is coming to an end," Mr. Bennett said. Commissions for high-touch buying and selling may not drop much beyond the 3.3 cent a share level at which they now stand.
But managers are still looking to cut trading costs by shifting their mix of trading from higher-cost, high-touch trading to low-touch electronic trading that costs closer to 1 cent a share.
Arguably, that means brokerage firms will have to decide whether they want to focus on low-touch trading and cut back on research costs, or lay out the cash on research to get paid on the high-touch end. Being in the middle will be very tough.
The brokerage firms that will get paid are those that have top research that clients want to reward, Mr. Bennett said. Firms that have middling research products will have the costs associated with paying analysts but may struggle to get the revenue.
Lower commissions, combined with weak volumes, have put a lot of pressure on stock trading desks and have left many struggling to make money. Because many Canadian firms have long depended on trading to cover the fixed costs of running a securities firm, the slump in trading income has had a big impact on profitability for firms, especially boutiques.
The firm that came out best in this year's Greenwich rankings, Royal Bank of Canada's capital markets unit, has been ramping up research.
Global equities head Greg Mills said it's paying off.
"We've made a considerable investment in not only the Canadian research platform but also delivering quality U.S. and European research to our Canadian clients, and it's great to see that being recognized."