The Buy-Side Dilemma: Research vs. Execution
Even though his firm currently does not use commission sharing, "There are a lot of positives in utilizing programs such as the CSA because it enables the shop to reduce the number of brokers it executes through, which, in turn, will strengthen the relationship with the broker-dealers [with which] you have the CSA relationships," Kane says. "And it's one step closer to unbundling."
Research, Research Everywhere
Further, the market for research has changed recently to the point that buy-side firms are getting research from many niche firms. Engemann Asset Management ($500 million in assets under management), a subsidiary of Phoenix Home Life in Pasadena, Calif., for example, uses research from 15 to 20 boutique shops, relates Kelly Bellomo, the firm's VP and head trader. "To get best execution for our clients, we looked at a lot of alternatives," she says.
Two years ago, the small-cap manager entered Instinet's Broker Share program to solve the problem of paying all its boutique research firms. The buy-side firm already was trading through Instinet's Newport and Portal front ends. "We were already using Instinet a lot to get best execution, so we're able to piggyback off something where we were executing anyway," says Bellomo.
This also is more cost effective, emphasizes the head trader. "If we traded through all the little boutique firms from which we get research, we'd have to open accounts with all these firms and build trading relationships," Bellomo explains. Instead, Bellomo continues to trade through Instinet to use its algorithms, and adds a penny to the execution rate to go toward research. "We're doing best execution and we're still getting the research," she says.
Instinet offers a Web site through which buy-side firms can track their accounts, relates Bellomo. "You can send an e-mail and tell the broker which firms you would like them to cut a check for," she explains.
According to Mike Plunkett, president, Instinet, North America, the institutional agency broker pioneered Broker Share three and a half years ago at the request of clients. "We put this program in place to allow them to reduce their trading relationships," he says. Rather than trade with research providers' trading desks, the buy side can consolidate its list of brokers and concentrate its trading with firms that offer algorithmic trading strategies and advanced analytics, Plunkett explains. "It becomes cumbersome when you have to pay 50 to 75 brokers," he says. "[Broker Share] pares that list down and allows [the buy side] to consume as much research as possible." Plunkett notes that the program has been growing exponentially every year because of the value it provides to traders. "It provides transparency, and it puts control of the research into the buy side's hands," he contends.
Forces Behind the Trend
CSAs are expected to become more popular, and brokers - particularly the bulge-bracket firms - are marketing the concept to buy-side firms aggressively, notes Integrity Research's Mayhew. Firms such as Credit Suisse, Goldman Sachs and Morgan Stanley are offering commission-sharing programs, he relates.
But, "They're not marketing the concept of CSAs," according to Mayhew. "They're marketing the concept of 'Don't you think it would be better if you had a research decision and an execution decision [separately],'" he says. "You can trade with the best execution provider, and through a commission-sharing arrangement, we can then pay a research provider from the pooled commissions." 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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