THE big four Irish stockbroking companies - Davy, NCB, Riada and Goodbody - are facing a sharp cut in commission income for dealing in equities, after three of the companies were forced into cutting the commission they charge institutional clients from 0.35 per cent to 0.25 per cent. Last year, Irish fund managers paid brokers £8.7 million in commissions, up from £5.8 million in 1995.

While some broking houses have suggested that this move to cut their commissions is purely voluntary, it is understood that some of the bigger Irish-based fund managers had already informed the brokers that as of yesterday they would pay a commission of only 0.25 per cent.

By the close of trading last night, Davy, NCB and Riada had cut the commission rate from 0.35 per cent to 0.25 per cent for dealings in all Irish public companies, while Goodbody had still to make a decision. But it is understood that Davy initially only offered to reduce commissions on dealings in the biggest five companies on the market - Bank of Ireland, AIB, CRH, Smurfit and Elan - before eventually deciding on a flat rate of 0.25 per cent for the entire market.

The brokers themselves were reluctant to comment on the circumstances leading to the cut in commissions, but sources within the fund management industry told The Irish Times that, for the past few weeks, some of the bigger fund managers had taken an aggressive approach in discussions with the brokers and adversely compared the 0.35 per cent commission in Dublin with the 0.25 per cent charged by London brokers.

It is also understood that some overseas investors active in the market told Irish brokers that they could no longer accept a situation where they paid Irish brokers 40 per cent more than British brokers.

While some Irish fund managers conceded that the quality of service from Irish brokers is higher than from British brokers, that perceived higher-quality service was not sufficient to justify such a large differential between commission rates in Ireland and Britain.

"We spoke to the brokers individually for over a month on this and we got various proposals from them - different commission rates for the larger companies and the smaller companies. But it always boiled down to the same thing - the differential vis-a-vis London was too high," commented one fund manager. "The brokers came up with too many complications," he added.

For the brokers, the cut in the commissions presents major challenges. They will, in effect, have to generate 30 per cent more business from the Irish fund managers merely to maintain the same level of commission income.

In a market like last year and the first quarter of 1997 where trading volumes are 50 strong, the brokers can probably cope with a cut in their commissions of this scale. But one broker warned that if the market does turn downwards and turnover in Irish shares and equity commissions fall, some brokers could feel the pinch.

The vast bulk of equity commissions are paid to the big four brokers. According to the Irish Association of Investment Managers, which represents most of the Irish-based institutions, Davy received equity commissions last year of £3.2 million - up from £2 million the previous year. Goodbody received £1.9 million (£1.3 million in 1995), NCB received £1.7 million (£1.4 million) while Riada received £1.3 million (£800,000). The only other broker that registers among Irish fund managers is Bloxham which received £400,000 last year (£300,000).

These figures do not include commissions earned from dealing on behalf of overseas investors, who have been increasingly active in the Irish market. The overseas institutions are understood to have been one of the prime movers to get equity commissions down to London levels.