New York—A recent survey in Traders Magazine suggests that client commission arrangements (CCAs) are spreading much more quickly and broadly in the U.S. than previously indicated.  According to the survey conducted in April, 43% of buy side firms responding to the survey are using CCAs now and another 12% are planning to begin using them in 2007.  Although it was not a statistically rigorous study, the survey does suggest that the penetration of CCAs in the U.S. is higher than we had previously thought.

The survey was conducted last month by sending an anonymous questionnaire to over 1,500 buy side traders.  There were 100 responses representing a 6% response rate.  The small sample size suggests we should treat the survey as indicative rather than definitive.  Nevertheless, there are some very interesting nuggets.

The headline on the survey is the extent of CCA penetration in the U.S.  It is very surprising that the majority of the respondents—55%--said they were either using or planning to use CCAs in 2007.  There could be some self-selection bias here—those traders who are currently using or planning to use CCAs might be more motivated to fill out the survey than those who aren’t, which would inflate the penetration numbers. 

Asset managers in the $50 to 100 billion range appear to be embracing CCAs most aggressively.  Overall, the larger buy side firms seem to be most likely to use CCAs at this point.  This finding is consistent with the adoption of CSAs in the UK.  UBS says that 80% of its top UK clients use CSAs.

The main appeal of CCAs is to consolidate trading counterparties.  In the Traders Magazine survey, the majority of CCA users have decreased the number of counterparties, and nearly half of CCA users have dropped their trading relationships to fewer than 30 counterparties.   78% of the survey respondents using CCAs expect there to be more consolidation.  Those not using CCAs also expect consolidation—62% of those not using CCAs expect fewer counterparties.

Small and mid-tier brokers are feeling the pinch (see our article on CE Unterberg earlier this week.)  There is no question that the impact of CCAs, along with the continuing technology and infrastructure investments required to maintain best execution, will squeeze out the weaker trading counterparties.  This is one of the main arguments made against CCAs—it consolidates trading into a smaller set of firms, primarily the bulge firms.

Interestingly, less than a third (29%) of the survey respondents are concerned or very concerned about concentrating a greater amount of flow among a fewer number of brokers. This may reflect the competitive landscape.  Although the bulge firms have been the most aggressive in promoting CCAs, buy side firms also execute CCAs through agency brokers like Knight, Instinet or CAPIS.  Although outside the realm of CCAs, the execution only and dark pool providers also represent a major check and balance to the bulge firms for buy side traders.  Our experience in the UK is that the larger buy side firms typically use 10 to 20 CCA brokers.

The full Traders Magazine article can be found at http://www.tradersmagazine.com/magazine2.cfm?id=1&aid=2818&year=2007.