Tabb Group has released its annual equity trading report, “U.S. Institutional Equity Trading 2007: Tracing the Path to Liquidity,” with some interesting findings for both the buy side and their sell side counter parts.

The report focused on a variety of topics affecting the buy side trading community from market volatility, to electronic trading, commissions and broker relationships, block liquidity, and of course dark pools and algorithms.

A lot to cover at one time, so I’ll start with commissions and broker relationships, which was apparently quite a hot topic, and continue with coverage on additional topics in subsequent blogs.

Tabb Group surveyed 65 head traders from money managers with aggregate assets under management of $12.6 trillion. Those money managers included a range of asset sizes—large firms with more than $150 billion, medium firms with $25 to $150 billion and small firms with under $25 billion in assets.

“Commissions are a growing issue we’re going to be hearing more and more about,” says Laurie Berke, senior consultant with Tabb Group. “Shrinking rates, shrinking commission pools to pay for services are driving the problems.”

She adds that buy siders are cutting back on the number of core brokers they deal with and figuring out to optimize a shrinking commission pool with the brokers that provide the most for their firm.

But the report did find that traders are easing back on the pressure they have been putting on brokers to lower rates in the past few years as lower commission rates around electronic trading becomes a bigger percentage of total volume.

“Looking ahead traders are pretty comfortable with where rates are,” says Berke. In fact, the survey found that over 60 percent of respondents were not interested in putting pressure on brokers to lower rates anymore.

When asked what the most frustrating thing about trading day to day was, sell side coverage topped the list. The reasoning? Berke says for one thing electronic trading tools don’t solve every problem, traders still want services and value add from their brokers. Lack of liquidity/fragmentation, commission management, compliance/reporting and technology were also key frustrations.

Berke says that while the industry is in the early days of commission sharing agreements (CSAs), almost half (48 percent) of large firms were already using CSAs. She says they tend to set up CSAs with their core brokers and end up doing two-thirds of their business with those core 10 to 20 brokers.

“They consolidate their commission dollars through their core firms, where they get the best execution and proprietary research, and they write a check for everybody else,” says Berke. The rise of CSAs though could spell trouble for smaller sell side shops according to Berke, as they won’t be able to compete effectively for trading flow. “We may find they can’t justify maintaining trading operations,” she explains. “Traders say they are uncomfortable trading with smaller guys and would prefer those firms are paid by check.”

Ultimately, Berke says this might lead smaller sell side shops to end up teaming with bulge bracket firms for distribution and touch points with buy side clients.

The report also ranked sell side brokers by commissions finding Goldman Sachs on top, followed by Lehman Brothers, Morgan Stanley, Credit Suisse, Merrill Lynch, ITG, Liquidnet, Citi, Bear Stearns, JP Morgan and UBS.

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