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Broker-Dealers vs. Agencies: Broker-Dealers Still Get the Majority of Commissions

Both the agency broker and broker-dealer service models are important to traders like Bryan Kievit, head trader for $600 million hedge fund Accipiter Capital.

While the buy side is willing to pay for high-touch agency broker service to execute difficult trades, large broker dealers still get the majority of trades. According to Bryan Kievit, head trader at New York-based hedge fund Accipiter Capital Management, his firm pays about $8 million to $10 million in commissions on equity trades, but none is specifically earmarked for a particular agency broker.

Bryan Kievit, Accipiter Capital Management

Bryan Kievit

"I don't go out and say I need to pay [Greenwich, Conn.-based agency broker] Weeden X amount," Kievit relates. "But I know I want to stay on their radar, and in order to do that I have to send business their way." Kievit says that in general he directs about 3 percent to 5 percent of his commission dollars toward Weeden. "For 2007 we were in the upper end of that range," he notes, adding that he doesn't rely on the firm for research.

But the majority of Accipiter's commission dollars, Kievit says, still goes to the bigger guys. "With these firms, however, research and other resources they provide are also key," he explains, noting that Accipiter maintains strong relationships with many bulge-bracket firms.

Still, Kievit stresses the need to balance that with his agency business. "If I have a difficult stock and I can't call one of the big guys and there is nothing in the dark networks, ... I need an agency broker," he explains. "I need someone who can go out and seek a buyer or seller. There is a need for an intermediary to communicate."

Further, Kievit points out, he sees a growing conflict of interest cropping up with the larger firms. "The larger firms are under so much pressure to make the cash equities business profitable that they're taking on more risk, and some are kind of becoming hedge funds in a lot of cases," he says. "So naturally there's a conflict there, and I wonder if a trader has a position and is really paying attention to my order."

With an agency broker such as Weeden, though, Kievit asserts, he's guaranteed that he won't have to deal with that. "If I'm buying a stock worth more than where I'm buying it and it's a tricky stock, I can pay someone like Morgan Stanley 5 cents, but maybe the trader won't do the best job," he contends. "Or I can pay Weeden 2 or 3 cents to get it done." The 2-cent differencial, Kievit stresses, is insignificant -- he says he's happy to pay extra to get the trade done. "If I'm looking to make 30 percent off a stock, I won't split hairs," Kievit notes.


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