In good times it’s easy to overlook the bad news or perhaps not even notice it at all. Such seems to have been the case at the biggest institutional investors during the great bull market run of the 1990s.
By Michael Carroll
April 2002
Institutional Investor Magazine
Their portfolios fattened with money from investors intoxicated by stunning returns, few big institutions paid much attention to the rising costs of doing business, particularly in trading. But after two years of dismal markets, that has begun to change, with one institution after another looking for ways to slash the high price of transactions, as Senior Writer Justin Schack and Staff Writer Rich Blake show in this month,s cover story, “The Buy Side Wakes Up,” beginning on page 58.
No wonder. For years institutions worried chiefly about commission charges, which typically run a nickel a share. But their true transaction costs are much higher. Foremost among these costs is market impact , the effect that executing big orders can have on the price of shares. How big is the impact? Plexus Group estimates that hidden expenses on trades cost the industry as much as $100 billion annually. Some of this is eaten up by Wall Street brokerages acting as intermediaries, and some is lost through market inefficiencies that have grown in recent years, in part thanks to government-mandated changes like the order-routing reforms on the Nasdaq Stock Market and the move to quote share prices in penny increments. These changes have made it much more difficult for institutions to trade big blocks of shares. “You,d think the world’s largest institutions would get a better deal on Wall Street than the average Joe , but they don,t,” says Blake.
The result is that big institutions, like Fidelity Investments and Putnam Investments, are taking matters into their own hands. “Minimizing costs is a top priority for the entire money management industry now,” says Schack. Institutions are approaching companies directly about buying and selling big blocks of shares, vastly increasing their use of program trading techniques and trimming the number of brokerages they use, all to chop costs. Too bad they waited until the tough times began to get their axes in gear.
