New York-A recent article in Wall Street & Technology examines Wall Street’s recent push to promote commission sharing arrangements (CSAs), profiling Credit Suisse’s CSA platform, Research Exchange (Rx). The article highlights the ‘land grab’ which is occurring as bulge bracket brokers are pushing to add market share. It also hints at the consequences of the current CSA push, which may not entirely be to Wall Street’s liking.
Credit Suisse’s CSA program is a global blanket agreement that applies to all asset classes, although it focuses primarily on equities. The primary selling point for CSA’s is is the ability to consolidate trading counterparties. According to the article, Credit Suisse’s clients are attempting to cut their broker lists from 100 to 30, while the largest money managers that have 250 brokers would like to cut that down to 100. This is what is motivating securities firms to aggressively promote CSAs.
According to the article, the other motivator driving the adoption of CSAs is that the buy side is looking to place a value on the research. In our view, this is less a driver to the process, and more a consequence. As CSAs become more prevalent, commissions get increasingly split between execution and research. And, as the CSAs process evolves, the dialogue ceases to be about best execution and shifts toward “best research”, i.e. which providers are adding value and how much value they offer. Credit Suisse is promoting this as a benefit of its platform: “Rx helps segment where the value exists, both in the execution venue and in the research providers who are providing the best research,” according to Manny Santayana, MD and head of sales for CS’s algorithmic trading capabilities.
The reality is that this is uncharted territory. Most buy side clients have yet to assimilate the basic fact that obtaining Wall Street proprietary research through full service commissions is defined as soft dollars under the SEC July 2006 soft dollar guidance. They are not yet focused evaluating research with the same gusto that they are now re-evaluating trading counterparties. That time is coming and in the meantime, the Street is starting to hedge its bets by more proactively offering third party research alongside its own proprietary research, through efforts such as Goldman’s Hudson Street Services.
The article concludes with a prediction that, with or without SEC commission disclosure guidelines, full service commissions will become transparent: “So what will happen to full-service trades? ‘It’s all going to unbundling,” predicts Santayana. ‘Unbundling seems to be the right thing to do as a fiduciary at this point.'”
For the complete article, click here.
Comment by Bill George:
From what I’ve recently heard, It seems the discussion about Commission Sharing Arrangements (CSA’s) and Client Commission Arrangements (CCA’s) is coming full circle.
I’ve recently heard that many large national full-service brokerage firms and many regional full-service brokerage firms are flatly refusing to participate in CCA’s and CSA’s.
Apparently, these firms don’t want to participate in any arrangement that would separate their execution services from their other proprietary services. This isn’t surprising since the institutional brokerage industry has long competed for institutional advisors’ patronage on the basis of the full range of proprietary services the brokers can provide. Also, it seems that the brokerage firms that are resisting CCA’s and CSA’s strenuously object to the necessity of unbundling and separately pricing proprietary research and other services, to facilitate submitting a research invoice to a (CCA or CCS) transacting broker.
Another interesting phenomenon, it seems there is increasing concern about CSA’s and CCA’s within the ranks of institutional investment advisors.
Advisors’ concerns seem focused on the likelihood of executing brokers using CCA’s and CSA’s frontrunning advisors strategies and frontrunning the securities they are trading if buy-side traders significantly reduce the number of brokers they use for execution.