By Simon Jessop
LONDON (Reuters) - Asset managers and hedge funds spent less money on brokerage house research and trading services year on year in 2013 relative to market volumes, and the squeeze is set to continue as more trades go electronic, TABB Group research showed.
While average daily equity market volume rose 16 percent year on year, commissions paid to brokerages climbed just 9 percent, the consultancy said in its annual European equity trading benchmark study.
"Commissions for our sample set may have risen by 9 percent in 2013 after 2012's dramatic decline of 27 percent, but the reality is that any upturn is unlikely to continue," author Rebecca Healey said in the report.
The survey of 58 head traders at equity management firms managing 14.6 trillion euros ($19.69 trillion) found that, while 68 percent valued traditional brokerage services, 52 percent cut the amount of business they put through brokerage sales-trading desks last year, against 14 percent who upped it.
Just 4 percent expected to increase the volume of business given to brokers in 2014, with more of the business instead set to be routed to market through electronic trading.
Over the course of the year, sales trading's share of order flow is set to fall to 25 percent while that for direct market access or algorithmic trading is seen up at 52 percent, TABB said.
Brokerages are reassessing what services they offer and their buyside clients what they buy in light of regulatory moves to make industry costs more transparent and improve returns to asset holders such as pension funds.
That focus on costs, while ultimately a good thing for the industry, is likely to lead to a number of changes, and open up new opportunities for specialisation for European brokers and asset managers, TABB's Healey said.
"Greater transparency in the research process will finally break the relationship between turnover of assets under management and the generation of research, not only impacting the total commissions paid, but fundamentally altering how research is bought, accessed and consumed, redefining the fragile ecosystem between buy and sell sides in the process."
In the short-term, for example, a buyside focus on spending commission money more wisely may result in fewer small and mid-cap companies being traded, which could affect the amount of research written about them and so make them even more illiquid than they already are.
Further out, though, this gap could be filled by niche, local companies who would be paid for specific knowledge or access, as and when needed, TABB said. ($1 = 0.7415 euros)
(Editing by Alison Williams)