NEW YORK — Bank of New York's $159 million agreement to acquire Lynch, Jones & Ryan Inc. from Instinet Group Inc., New York, vaults the bank into the top echelon of commission recapture brokers. But it's a business that some industry executives said could be headed toward extinction.
"Commissions are shrinking, meaning there are very few money managers paying 5, 6 cents (a share) for execution," explained Ross McLellan, managing director at State Street Global Markets LLC, Boston. "It's moving down into the 3, 4 cents range and it's difficult to recapture 70% to 75% of a 3- to 4-cent commission.
"We're going to have to see some rates go down in terms of what plan sponsors see as (commission) rebates," he said, adding that low commission rates combined with commission unbundling could eventually kill off the recapture business.
He said within the next five years, brokerage firms will increasingly break out how much of a commission goes to the trade execution and how much goes to pay for research, a movement that has already begun.
"A lot more money managers are trading at discount rates," he said. "That may eliminate the need for recapture."
In a commission recapture program, plan sponsors or mutual fund managers receive rebates — either in the form of dollars or credits — from brokers for executing trades. This way, the plan sponsor or mutual fund pays only for trade execution and no other services, such as research.
Richard A. Kos, founder of Kos Consulting Group, Madison, Conn., an investment consulting firm, said when the execution-only commission rate reaches 1.5 cents, "who needs commission recapture?" Currently, the rate is 2 to 4 cents.