Average commission rates on New York Stock Exchange agency trades for institutional investors have fallen by 60% to 80% since deregulation on May 1, 1975, according to new research by Greenwich Associates. The report suggests commissions could be headed even lover.

“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,” says Greenwich Associates consultant Jay Bennett. “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.”

The new Greenwich Report finds that for the typical U.S. institution, weighted average commission rates on NYSE agency trades fell from 4.5¢ per share reported in Q1 2004 to 4.1¢ in Q1 2005. Institutions expect this average to fall to just 3.9¢ over the next 12 months. The largest commission-paying institutions, are seeing even lower rates. Institutions that generate more than $50 million in annual U.S. equity commissions reported paying a weighted average of just 3.9¢ per share on NYSE agency trades, and expect to pay only 3.7¢ over the coming year.

Similarly, commission rates are falling on NASDAQ trades. Weighted-average commissions on these trades dropped from 4.2¢ per share in 2004 to 3.9¢ in Q1 2005. Hedge funds paid the lowest commissions on NASDAQ trades this past year at a weighted average of 3.7¢ per share, followed by investment managers at 3.9¢, and mutual funds at 4¢ per share.

In addition to squeezing commission rates on “normal” agency trades, institutions are further minimizing trading costs by directing an increasing proportion of their business to self-directed electronic trading systems, Greenwich adds. “More than 80% of institutional investors in the United States now use electronic trading for some portion of their NYSE or NASDAQ business. “Low-touch” or “no-touch” self-directed electronic trading systems have replaced “high-touch” single-stock trades with broker sales traders for almost 20% of U.S. equity trade volume,” it says.

Average commission rates on self-directed electronic trades were stable year to year at 2.6¢per share, and the largest institutions in the market are now paying an average of just 1.9¢ on their electronic trades, Greenwich says. For alternative trading systems and ECNs, commission rates across all institutions averaged 2.5¢ per share, as compared to 2.8¢ per share for broker-sponsored direct access systems, it adds.

“Of the $11.3 billion that U.S. institutions paid in U.S. equity commissions during calendar year 2004, about 40%, or approximately $4.4 billion, was used to pay for broker research and sales — a level in line with that of the prior year,” the firm reports. “When it comes to allocating commissions earmarked for equity research, institutions continue to place a higher value on securing access to corporate management teams and sell-side analysts, and a lower value on thematic research and individual stock picks.”

“If the proportion of commissions allocated for direct access to company management are combined with those allocated for research conferences and industry seminars, which are valued largely as a chance to meet with companies, you see that 30% of all research commissions are now being spent securing access to company management,” says Greenwich Associates consultant John Webster.

Portfolio managers at U.S. institutions indicate they are currently paying 15% of their equity research commissions to “independent” research boutiques, up slightly from the 14% paid to this group last year, Greenwich adds. Hedge funds are directing the highest proportion of research allocations to independent boutiques at nearly one-in-five research commission dollars, it notes. Mutual funds and investment managers direct 17% and 15% to independents, respectively, while pensions, endowments, and banks spend roughly 10% of their research commissions on insights from independent boutiques. Looking ahead, 45% of institutions expect increases in their payments to independents, Greenwich adds.