CCAs Top 40% Penetration in US
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 implications for research are huge. The proliferation of CCAs accelerates the
de-facto unbundling of research and execution.
Although bulge firms have worked hard to structure CCAs so that their
own research is exempted from the unbundling, we doubt this will endure. Firms like Marsico Funds are already using
CCAs to unbundle both bulge and non-bulge research. Buy side firms will implement more coherent
research procurement processes, and demand more accountability from research
providers of all varieties. The era of “free”
research is ending, and all research professionals—whether sell side, buy side
or alternative—better be prepared.
The full Traders Magazine article can be found at http://www.tradersmagazine.com/magazine2.cfm?id=1&aid=2818&year=2007.
Integrity Research Associates, investment research, equity research, research providers, alternative research, alternative research providers, independent research, independent research providers, independent equity research, U.S. investment research, U.S. equity research, U.S. research, investment banks, bulge bracket firms, securities firms, asset managers, money managers, institutional investors, unbundling commissions, unbundling equity commissions, research costs, execution costs, soft dollars, commission sharing agreement, CSA, client commission arrangements, CCA
Posted at 08:35 am by Sanford (Sandy) Bragg
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