Agency Brokers Getting Squeezed


New York, NY – As we reported last week, agency broker Lighthouse Securities closed its doors as the firm was unable to meet payroll.  While market participants explain that there were many reasons for the firm’s failure, one issue that many feel impacted Lighthouse, as it has hurt  other agency brokers, is the buy-side’s unwillingness to execute more business with firms that don’t also provide research.

According to a recent report published by Boston-based consultancy, Tabb Group, institutional investors will pay brokers approximately $15.3 billion in equity commissions in 2010, up slightly from the $14.9 billion in commissions paid in 2009, and the $17.2 billion generated in 2008.  

Despite the fact that equity commissions are expected to rebound slightly in 2010, it is unclear that agency brokers will experience any of this rebound.  Not only are buy-side firms increasing their use of low touch execution venues like algorithms and ECNs, but traditional sell-side banks are recapturing some of the market share they lost in the wake of the Lehman Brothers failure.

In fact, a number of agency brokers have told us recently that asset managers are explaining reduced execution volumes because the brokers don’t provide them with research or access to the new issues calendar.  Others have noted that large sell-side firms have been aggressively targeting mid-tier buy-side accounts that they never bothered to serve in the past. 

Either way, many agency brokers have found that their business has been squeezed in 2009 and again in 2010.  This is one reason that a number of agency brokers and ECNs have started focusing their energy on research in recent months.  Below we have listed just a few of the recent moves that various agency brokers have made to enhance their research offerings.

  • In January, 2010 Hudson Holdings, the publically traded parent of execution provider Hudson Securities, announced that it was acquiring boutique investment bank and research provider Next Generation Equity Research for an undisclosed sum.
  • In March, 2010 BTIG, announced that it was expanding its business by adding a fundamental equity research group division initially focused on the telecommunications, media, cable and satellite industries .  The firm hired research industry veterans Richard Greenfield and Walter Piecyk to head up the effort.
  • Also in March, Instinet announced the launching of a new corporate access service called Meet the StreetTM, thus joining Liquidnet, BNY Convergex and Capital Institutional Services (CAPIS) in recent launches of corporate access products.  This initiative is in addition to the Instinet Access alternative research platform.
  • In June, 2010 Capital Institutional Services (CAPIS) announced that it had added Zelman & Associates to it Alliance platform.  Through this platform, CAPIS provides buy-side clients a number of independent research products, from broad based platforms to sector specialists, channel check services, corporate access and bespoke research providers.
  • In early July, 2010 Greenwich-based Weeden & Company announced that it had formed an exclusive trading and marketing partnership with independent research provider, Sector & Sovereign.  This initiative is in addition to the hires that have taken place in recent years, as Weeden has quietly transformed its agency brokerage business by adding analysts and building a more traditional boutique investment banking firm.
  • Later in July, Investment Technology Group, Inc. (ITG) announced the hiring of Jamie Selway as a Managing Director to provide ITG clients with analysis of market structure and potential developments in the regulatory environment. This follows ITG’s move in late April when it announced a strategic partnership with Disclosure Insight, an independent firm specializing in providing forensic research.  ITG made an undisclosed investment in Disclosure Insight and plans to market the firm’s research to its buy-side clients. 

The big question that remains is whether the various research initiatives described above will help these agency brokers and ECNs to capture more buy-side execution business, and whether they can do so at higher commission rates?  We will keep an eye on these developments over the coming months and keep you, our readers, informed.


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  1. In the late 1990’s, the SEC’s Office of Compliance, Inspections & Examinations’ (OCIE) conducted soft dollar brokerage “Inspection Sweeps” which examined “the soft dollar practices of broker dealers, investment advisors, and mutual funds”. The examinations focused almost exclusively on third-party brokerage firms which offered independent research payment for the “paid-up” (soft dollar) portion of the brokerage commission charge. The inspection examinations ignored the soft dollar brokerage commissions “paid-up” in bundled undisclosed brokerage arrangements with full-service brokers.

    During the “Inspection Sweeps” many third-party (agency only) brokers and an organization called The Alliance in Support of Independent Research sent letters to the SEC and the OCIE division of the SEC commenting on the methodological bias in the OCIE’s examination proceedures. These letters requested that the SEC also examine soft dollars used to buy unidentified proprietary services from full-service (investment banking) brokers, with the same intensity they were examining third-party agency only brokers.

    The SEC ignored these requests for the examination of the bundled undiclosed (non-transparent) soft dollar brokerage arrangements advisors use to acquire proprietary research and other services from full-service brokers.

    The release of the SEC OCIE’s Inspection Report On The Soft Dollar Practices of Broker Dealers, Investment Advisors and Mutual Funds (published September 22, 1998) was a ‘watershed’ event. The Inspection Report did not mention the bundled undisclosed soft dollars used to acquire proprietary services from full-service brokers.

    If you study the changes – in third-party brokerage and independent research provision – that have taken place since late 1998 you will notice that many of the mergers, acquisitions and consolidations seem to be organized toward the goal of offering proprietay services in exchange for paid-up commissions and using obscured pricing models for those services.

    THE LESSON: If you can’t get a level playing field, copy those who have the lobbyists.

    See> SEC OCIE Inspection Report on the Soft Dollar Practices of Broker Dealers, Investment Advisors, and Mutual Funds

    See> The website of The Alliance in Support of Independent Research at

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