CSA Use Grows on Buy-Side


New York, NY – According to a report recently published by Boston-based consulting firm the Tabb Group, three-quarters of all US buy-side firms currently use commission sharing agreements.  In addition, one third of those who currently don’t use CSAs are expected to add them to pay for their third-party research by the end of 2011. 

Tabb Group’s new report called “U.S. Institutional Equity Brokerage 2010: Assets, Commission Management and Concentration” revealed that 76% of U.S. buy-side firms are using CSAs.  Of the 24% that don’t use CSAs, 37% are expected to have these agreements in place by the end of 2011.  In the study, Tabb interviewed 121 institutional equity management firms, including 68 head traders in the U.S., managing an aggregate of $12.9 trillion.

The reason for the increased use of CSAs is that buy-side investors are looking for greater flexibility to trade with “best execution” providers, while still finding efficient ways to pay for the research required by their analysts and portfolio managers.

Buy-side use of CSAs continues to gain traction in the past few years.  In 2007, Tabb reported that only 40% of US buy-side institutions used CSAs, a total which rose to 58% in 2008, and 65% in 2009.

While the percentage of buy-side firms using CSAs are expected to rise in 2011, the amount of the commission pool directed through CSAs is remaining relatively flat.  According to research conducted by Greenwich Associates in 2010, approximately 22% of institutional equity commissions were paid out through CSAs. This was virtually unchanged from 2009.

One of the big trends revealed in the new Tabb report is increased consolidation among fewer and fewer brokers.  In 2010 and 2011, 50% of U.S. buy-side investors are directing all of their CSA commission allocations through fewer than 10 CSA brokers. According to the Tabb report, the average buy-side firm uses about nine brokers.

Another conclusion of the Tabb report is that while buy-side firms’ use of CSAs is rising, and the number of CSA brokers used by the buy-side is falling, the total US equity commission pool continues to shrink.  According to the Tabb Group U.S. institutional equity commission revenue in 2011 is expected to slip 17% to $7.25 billion.  This follows a 21% plunge from $10.58 billion in 2009 to $8.37 billion in 2010.

This data shows that buy-side firms are becoming increasingly more selective about the brokers they dole out their limited commissions to.  Most institutional investors are trading less and less with execution only venues and are directing their trades to broker-dealers that provide value-added “alpha generating” services, including research, management access, or access to the IPO calendar.  This is one reason that many traditional agency brokers have tried to add these value-added services in recent years – either through hiring staff, building new services, acquiring research firms, or partnering with third-party providers.

In the midst of this difficult market environment, full service brokers have been able to gain market share as they offer the buy-side a wide product suite including a global research product, access to IPOs, commission management services, algos, smart order routing, and other sophisticated execution services.


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