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Will the Buy Side Shift Trading Relationships to Agency Brokers?

As Bulge Brackets Pull Back on Liquidity, Agency Brokers and Super Regional Banks Step up to the Plate

Last week's panic in the financial markets may cause some buy-side institutions to rethink their trading relationships and shift business away from the bulge bracket toward independent agency models.

Today TowerGroup released a new research report contending that the unprecedented restructuring on Wall Street will have a lasting and major impact on the investment management business. TowerGroup believes the apparent demise of the independent brokerage model will force investment management firms to carefully reassess their reliance on Wall Street brokerage firms for research, trade execution, market insight, and back-office service. The research firm is predicting less capital commitment and a decline in the extent and quality of execution services.

As reported in "Wall Street Trader Reaction and CSAs" many buy-side firms that have CCAs (client commission arrangements) for equity trading with bulge bracket firms, were concerned about leaving the commission credits at some of these bulge-bracket firms. Even prior to last week buy-side institutions were already looking into transferring their CCA programs away from Lehman since the firm had been struggling for several months with toxic mortgage securities on its balance sheet.

"We had several buy-side institutions that have contacted about moving their CCA/CSA programs to us," commented Jim Morrow, COO of Capital Institutional Services(CAPIS), a mid-size institutional agency broker, whose core business is client commission arrangements (CCAs).

But can they move the funds or are they tied up in Lehman's bankruptcy filing? "CAPIS has clients that are being told by Lehman that they can move positive CCA/CSA balances to CAPIS to be used for research under 28e," according to Morrow. "As of this morning (last Tuesday), CAPIS has not yet received the transfers of these balances, but we would not have expected the balances to be with CAPIS yet," said Morrow who was interviewed last Tuesday.

However, late Friday afternoon, CAPIS heard back from Lehman Brothers and was told "that all CSA/CCA balances will be transferred to Barclays Capital on Monday, and they will not be transferring balances to other brokers. The investment community will need to work out their CSA/CCA balances with Barclays," according to Morrow.

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

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