John Barker, managing director of Liquidnet Europe Ltd. in London, was surprised to hear in mid-July that institutional traders wanted more help from their brokers and were prepared to pay more for the service.
He heard that not once, but twice within the same week.
“I had a conversation with a buy-side trader and, a couple of days later, another with an agency broker. They were both saying the same thing: ... If institutional traders feel they are getting the level of services and market color they need, they are prepared to pay for it, definitely,” said Mr. Barker, who heads the European institutional block-crossing business of Liquidnet Holdings Inc., New York. In the U.S., Liquidnet is the largest block-trading agency broker, according to Rosenblatt Securities Inc., New York, which monitors crossing networks' volumes.
If continued, this change would mark a reversal of a multiyear trend that, as a result of technology, has turned trading into a commodity and lowered commissions.
Commissions started declining in early 2000 amid a budding price war among new electronic execution venues. The trend accelerated beginning in 2004, as technology gained strong acceptance on the institutional desks because of the New York Stock Exchange's move to a part-electronic hybrid format.
According to data from research and consultancy TABB Group LLC, New York, commissions fell to an average 3.41 cents per share in 2007 from 4.5 cents a share in 2004 for placing an order through a trading desk. Fees charged for electronic trading were slashed, to 1.1 cents a share from 2 cents a share for crossing networks and to 1.05 cents a share from 2.5 cents for direct market access.
The change in attitude by institutional money managers is being driven by the highly volatile markets of recent months. In particular, trading in small-cap stocks — both domestically and overseas — has become much more difficult at times.
“Buy-side desks are starting to be comfortable about paying higher commissions if they are getting quality of services and certainly quality of execution. They'll pay for some level of voice broking or for being able to talk to sell-side traders at an agency broker,” Mr. Barker said, referring to placing orders over the phone to a desk for really difficult trades.
Richard Vigsnes, senior vice president and global head of equity trading at Northern Trust Global Investments in Chicago, agrees that communication with brokerage desks provides valuable support in a difficult market environment. The firm, a unit of Northern Trust Corp., Chicago, has $751.4 billion in assets under management.
“Communication has more value in more stressful time. It's a new reality. Now, you can get color and an opinion and come up with a strategy. A lot of this comes from phone conversations,” Mr. Vigsnes said.
Finding the right match for thousands of shares in a little-known U.S. or European stock amid dozens of marketplaces is never easy, but trying to do so in a hectic market is a real challenge for the institutional trader.
“We are in the area of high-touch electronic trading,” said John Giesea, president of the Security Traders Association, a non-profit industry group in New York.
“I know it sounds like a contradiction in terms — high-touch, which means broker-assisted trades, and electronic trading, which means no broker intervention — but this has been the trend since last summer,” Mr. Giesea said.