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Monday, July 21, 2008
Buyside Continues to Reduce Trading Partners
New York – In an article in Traders Magazine.com
a discussion of the impact of CCAs on the number of trading partners is
discussed. The article is based on a Greenwich Associates study that finds that
the adoption of CCAs and the resultant reduction in trading partners is
progressing rapidly.
The study finds that the 47% of buy-side institutions are
planning to adopt CCAs in 2008, compared to 27% at the end of 2007. Even more
telling, 44% of the respondents said they were expecting to shorten their
counterparty list in the future. In addition, the larger shops—those paying
more than $50 million in commissions cut almost 32 trading partners on average.
The trend towards fewer trading partners was predicted early
on. A study presented by James Bennett Jr. at the Institutional Brokerage
Conference in New York, indicated that the number of brokers used to receive
Equity Research was set to fall. Fully 36% of the survey group indicated that
they were going to use fewer brokers. The benefit to buy-side accounts is that
they can have fewer trading partners and not give up the research they find
valuable.
Clearly, this is the trend that sell-side research platforms
are trying to attenuate. By providing third party research services, the odds
that the counterparty will trade with that broker is greater, if the
broker offers more services than others.
This is an even greater a concern for mid-sized, regional IBs,
which will find it hard to maintain their trading relationships with clients. In
response, the regionals are looking at growing their offerings or consolidation
to maintain their businesses.
Posted at 11:27 am by Thomas Hutchinson
 | | | Bill George
July 23, 2008 11:36 AM PDT
Some Problems with Client Commission Arrangements
The premise for creating Client Commission Arrangements (CCA) was to facilitate investment advisors’ concentration of trading with an executing brokerage firm which claims to provide “best execution” then allocate some excess commissions generated from these trades (with the executing broker) to pay for third-party services.
In my mind CCA’s are problematic for a couple of significant reasons:
(1) Although execution analysis and execution evaluation has been attempting to identify and quantify “best execution” for more than thirty years there still is no uniform definition of “best execution” and there is no standardized and universally accepted methodology for measuring best execution. (Does one use value weighted average trade price (VWAP), the Elkins/McSherry method, the ITG Plexus method, Abel/Noser’s approach, Gil Beebower’s SEI Model, or . . . .) And, is “best execution” defined as above median performance, the top quartile or the top quintile of all trades executed by the broker, or can a broker claim to have expertise executing trades in a specific capitalization range or industry group. My point: I suspect there are more brokers claiming to provide “best execution” than brokers who can actually prove they provide “best execution” on a consistent basis.
(2) The current structure of Client Commission Arrangements (CCA’s) further institutionalizes the historic competitive advantage full-service brokerage firms’ proprietary ‘services’ have enjoyed as compared to third-party provided services. In the current (U.S.) regulatory environment, and as CCA’s are presently structured, CCA’s provide a cover for the continuation of the tradition of bundling and not disclosing brokerage firms’ proprietary services. While at the same time, CCA’s further institutionalize processes that force the specific identification and detailed disclosure of third-party provided services. This lack of identification and disclosure of full-service brokerage firms’ proprietary services purchased by fiduciary investment advisors’ with their institutional clients’ brokerage commissions makes it difficult, if not impossible, for clients, co-fiduciaries and regulators to monitor and test for fiduciaries’ appropriate uses of institutional clients’ brokerage commissions [under Section 28(e) of the Securities Exchange Act of 1934, and test for conformity with fiduciary duty].
In July of 2006, at the time of the release of the SEC’s “Commission Guidance Regarding Client Commission Practices Under Section 28(e) of The Securities Exchange Act of 1934”, Chairman Cox agreed to “soon issue interpretive guidance on commission disclosure and transparency” during the same announcement several SEC Commissioners and staff members commented on the importance of this “second wing of guidance on the disclosure and transparency of the uses of institutional clients’ brokerage commissions”.(1) The SEC has been reminded of this “promise” of additional guidance several times, but so far, no such additional guidance seems forthcoming.
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(1) See, Commission Guidance Regarding Client Commission Practices Under Section 28(e) of The Securities Exchange Act of 1934 (July 18, 2006) at > http://www.sec.gov/rules/interp/interparchive/interparch2006.shtml and see, SEC “Sunshine Meeting” July 12, 2006 at > http://www.connectlive.com/events/secopenmeetings/2006index.html
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