LOS ANGELES - The value of institutional trading in both Nasdaq-listed and exchange-listed shares slipped dramatically during 2002 among the 1,481 brokers in the Plexus broker universe.
Institutional trade value in Nasdaq-listed shares declined 38% in the 12 months ended Dec. 31, to $601 billion from $971 billion at the end of 2001. Nasdaq institutional trade value has been slipping steadily since surpassing $1 trillion for the first time in 2000. Meanwhile, the value of institutional NYSE-listed trading declined 17% during 2002 to $1.9 trillion from $2.3 trillion at the end of 2001.
Commissions for Nasdaq-listed shares increased significantly during 2002, according to Plexus data, to an average of 3.7 cents per share, from just less than 1 cent (0.8 cents) at the end of 2001. Commissions on NYSE-listed shares averaged 4.4 cents per share, down slightly from 4.6 cents per share at the end of 2001. Plexus officials are quick to point out that commissions usually are the smallest component of overall transaction costs, which include trade delays, market impact and missed trades.
"Cleaner" trades
One reason for the increase in commissions for Nasdaq shares is the ongoing shift by large Wall Street brokers to agency trading, said David Hall, managing director at the Plexus Group Inc., Los Angeles.
Mr. Hall said institutional investors can obtain lower commission costs by using electronic communications networks, but using an agency broker allows them to use soft dollars to purchase research and other services. In addition, he said, agency trades are "cleaner" and provide more explicit commission information. Agency brokers help facilitate trades without taking ownership of securities, much like a real estate broker in a residential home sale. Principal brokers risk their own capital by taking positions buying from one party and selling to another.
"The shift toward agency trading has been ongoing now for the last three or four years," said Mr. Hall. "Agency trading means commissions are eligible for soft-dollar trading. It gives money managers more flexibility in using soft-dollar budgets."
According to Plexus, institutional brokers added a median value of five basis points to Nasdaq-listed share trades, down from 17 basis points at the end of 2001, while brokers added one basis point for NYSE-listed share trades, unchanged from 2001.
The value-added data is drawn from broker experience in the Plexus universe and the average broker is usually at or near zero, said Mr. Hall.
The Plexus data show that in 2002 for the first time two ECNs - Archipelago and Instinet - were among the top five brokers for best execution for Nasdaq-listed shares. In addition, four of the top five brokers for best execution of Nasdaq-listed small-capitalization stocks were ECNs or alternative electronic trading systems: Instinet; ITG/POSIT; Bloomberg Tradebook; and Liquidnet.
