Cogent is taking steps to ensure the confidentiality of the buy-side information with respect to trading activity, research payments and relationships with different research providers. Hodgkins said the brokers will “have no access to our commission data or servers.” The brokers will also not know what everyone is paying. If there’s a new research provider or buy-side firm that joins, none of the parties will have knowledge of their existence on the platform unless they have a relationship with the firms, said Hodgkins. “We will have complete secrecy and confidentiality of relationships,” he said. “The money managers don’t want others to know who they have research relationships with,” said Hodgkins. For instance, there are some buy-side firms that spent a lot of money tracking down a particular research firm. “We honor that confidentiality,” noted Hodkgins, adding that is key to the success of an open portal.
According to Hodgkins, the buy-side can use the portal to pay research providers in three ways: The client can go in and make individual decisions as to which broker should pay which research provider or it can have an algorithm put together a plan to automatically pay the bills based on their balances with each of the brokers. The third way is to put balances in a big pool and allow Cogent to make the payments.
But firms are not necessarily comfortable with a centralized aggregation model. Firms are not comfortable pooling their money in a single place until these balances are set up as client monies, he said. “Until that’s across the industry, we feel that this distribution risk is a major step in the right direction to increase the confidence of the buy side that their monies won’t be tied up and be lost,” said Hodgkins.
He acknowledged that there are still counterparty risk concerns among the institutions. “People are concerned about putting all their money in one place and having that firm go under or having their money trapped in a bankruptcy or trustee receivership,” said Hodgkins. “What people have done is move away from a central aggregation model to distribute their risk over a lot of counterparties,” he said.
“The buy-side firms are saying it’s enough for them to know that they can distribute their balances over a lot of brokers and that they can view it as one lump sum via the Cogent portal,” said the commission management expert. “Rather than have all your eggs in one basket, the buy-side can have a lot of eggs in a lot of baskets,” said Hodgkins. In addition, institutions are paying their research providers more frequently, which is another safeguard, he said.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio