The typical institutional investor paid weighted average commissions of 4.1 cents per share in the first quarter of 2005 for trades on the Big Board and expects commissions to drop to 3.9 cents over the next year, according to a report issued publicly today by Greenwich Associates. That's down from 4.5 cents in the first quarter of 2004.
Large institutional investors, which generate more than $50 million in annual commissions on trades on the New York Stock Exchange, currently pay a weighted average of 3.9 cents per share and expect to pay only 3.7 cents per share over the coming year.
Commissions for trades on the Nasdaq stock exchange have also fallen, to a weighted average of 3.9 cents per share in the first quarter from 4.2 cents in 2004. Hedge funds paid the lowest commissions for trades on the Nasdaq in calendar year 2004, a weighted average of 3.7 cents.
"Equity commission rates have been on a path of steady decline since deregulation, and that trend continues due to the growing popularity of self-directed electronic trading alternatives and program trading," said Jay Bennett, a Greenwich consultant, in a statement. "As regulators, institutional investors and brokers wrestle with complex issues like commission unbundling and soft dollars, it is important to keep this pronounced downward trend in commission rates in mind."
Of the $11.3 billion that institutional investors paid in equity trade commissions in calendar year 2004, about 40%, or approximately $4.4 billion, was used to pay for broker research and sales, in line with the preceding year. A large proportion of the commissions allocated to "research" are used for gaining direct access to company management in meetings as well as conferences and seminars, rather than for individual stock picking, according to the report.
Separately, the average hedge fund portfolio manager received annual cash compensation of nearly $1.2 million in 2004, according to the report. The total includes about $280,000 in average salary and $900,000 in actual or expected bonuses.
A typical CIO at a U.S. buy-side institution earned more than $875,000 last year, an increase of roughly 15% from 2003, the report said. Total CIO compensation included an average bonus of $555,000, a 20% increase from the prior year.
Meanwhile, average compensation for U.S. equity portfolio managers increased 12% in 2004 to $590,000, which included a typical actual or expected bonus of $375,000. Total compensation for directors of research at U.S. buy-side institutions rose 15% in 2004 to an average of $475,000, which included an average bonus of $265,000. Cash compensation for head traders increased 10% in 2004 to an average of $350,000, which was typically evenly split between salary and bonus, according to the report. Buy-side analysts' total average compensation increased to $270,000 in 2004 from $215,000 in 2003, with an average bonus of $145,000.
The report said about 40% of bonuses for investment professionals are determined by individual investment performance, while about 25% of bonuses are dependent on organizational investment performance. While buy-side compensation increased during 2004, the report said, staffing levels have remained roughly flat over the past 12 months.
Greenwich interviewed equity portfolio managers and equity traders at nearly 400 institutions that invest in domestic equities, said David Deschenes, Greenwich spokesman. The interviews took place between Nov. 29 and Feb. 18. The report, "The Legacy of May Day," marked the 30th anniversary of the abolition of fixed commissions.
