The growth of portfolio trading to 50% of overall share volume from 44% in 2003 runs parallel with steady declines in commissions, says the report, which fell to an average of 2.2 cents per share from 2.5 cents in 2003, with the most active portfolio trading institutions paying just two cents.

"For institutional investors, the game is pretty favorable right now," says Greenwich Associates consultant Jay Bennett. "Institutions are lowering costs by using portfolio trading for a larger proportion of their volume and by directing a portion of those portfolio trades to self-directed electronic trading systems. In addition, they appear to be saving money by doing more risk trades as opposed to agency business. Combined, these trends represent a big win for the institutions."

Among the 185 most active trading desks participating in Greenwich Associates’ 2004 research, the average portion of equity business directed to portfolio trading increased by seven per cent last year to approximately $7 billion.

However, the research indicates that the growth in portfolio trading seems to be leveling off, with institutions predicting that volume will remain at 50% of total equity trading over the next 12 months.

"Brokers are competing for portfolio trading business, but this effort has been primarily defensive," says Greenwich Associates consultant John Feng. "It now appears that things might be settling out at a mutually acceptable level."

Self-directed electronic trading systems accounted for approximately 38% of portfolio trade volume last year, up only slightly from the 35% reported in 2003. Due to uneven usage among the largest institutions, self-directed volumes could drop closer to 2003 levels next year, suggests the report.