“Fidelity Investments has fired a shot across the bow to Wall Street over trading costs,” writes Ann Davis in today’s Wall Street Journal.

“In a letter to the Securities and Exchange Commission, the mutual-fund giant has proposed that big securities firms stop their longstanding, lucrative practice of charging “bundled” trading commissions without breaking down what exactly the money pays for.”

“Fidelity Investments is calling for brokerage firms to assign a value to the trade itself, and then quantify the value of stock research and other perks that brokers historically have thrown in as part of the deal. These extras push trading costs at most full-service Wall Street brokerage firms to about five cents a share, twice or even triple the cost of executing a trade at low-cost electronic alternatives. The costs, totaling billions of dollars, are passed along to mutual-fund shareholders.”

“Should Fidelity’s proposal gain momentum, the ramifications for the securities industry are potentially large. Wall Street long has resisted unbundling its all-in-one trading price, arguing that much of the market expertise it provides clients in big trades isn’t readily quantifiable. But critics say some resistance stems from fear that, if the costs are broken down, the mutual-fund companies may argue they’re overpaying for stock research produced by brokerage firms.”

“Mutual funds themselves are under pressure to cut costs to investors, amid the fund-trading scandal.”

“Already, Wall Street firms are scrambling to overhaul their research products to address institutional investors’ criticisms that much of what they’ve long produced is redundant or biased, even as they struggle to further reduce research costs. With new prohibitions on tying investment-banking revenues to research budgets under a regulatory pact signed by 10 big securities firms last year, Wall Street stock-research budgets are down by about one-third since 2001, according to Brad Hintz, an analyst at the Sanford C. Bernstein unit of Alliance Capital Management Holding LP.”

“Commission rates have been on a slow decline for years, and Wall Street wants to avoid another drop. While Fidelity hasn’t called for each service to be sold separately, merely forcing Wall Street to put a number on research and other add-ons would give trading clients ammunition to say they don’t want to pay for everything in the package. Most Wall Street firms acknowledge that only about two cents of the standard five-cent commission goes toward trading execution.”

” ‘Fidelity believes the time has come for the Commission to introduce dramatic change in disclosure rules,’ it says in the March 2 letter. The 22-page memorandum, written by product-strategy Vice President David Jones and the investment-management arm’s General Counsel Eric Roiter, was posted late last week on the SEC’s Web site but hasn’t previously been made public.”