Execution vs. Stickiness


New York – The results of Integrity’s recent CSA/CCA report (see below) highlights the fact that the unbundling of commissions we have seen over the past several years, related to demonstration of best execution, have worked to the advantage of the agency brokers. Full service brokers were initially mooted to have an advantage in an unbundled world, simply because of their perceived ability to attract the trade flow, to institute systems designed to give clients greater ability to monitor the execution cost separately from their research expenditure, and offer adequate liquidity. Because research could be paid for through CSAs/CCAs, the full service brokers could offer execution and pay for third party research through CSAs.

In light of this, the results of the CSA/CCA report—that the agency brokers had in fact picked up market share—seems to be counterintuitive. That is until one looks at (a) the financial market meltdown and (b) the implicit costs of proprietary research within the full service broker community.  The first point gave the agency brokers time to take market share, while the bulge brokers were trying to right their respective ships. The second point relates to the bulge bracket commission allocation, which tends to set aside commission pools for the proprietary research provided to clients. While this is not included in the execution price, it is an added non-discretionary cost associated with doing business with a bulge bracket broker.

Agency brokers, however, do not have this implicit cost, so that they can be engaged for execution ability alone. This is indeed what the results of Integrity’s survey of buy-side accounts did show. But it is important to note that, at least anecdotally, a counter trend is developing. In recent conversations with agency brokers, we have detected a salient theme in their strategies for the future, which includes providing more services to clients in order to make their services more “sticky”. Part of this strategy includes the provision of research to clients.

For the alternative research space this is an opportunity to gain both extended distribution and potential sales representation.

The 99-page Integrity ResearchFocus® report details the survey findings including CSA/CCA usage patterns, comparative analysis and ratings of the seventeen most prevalent CSA providers, and Integrity Research’s 2010 Top Picks for Overall CSA Provider, North America, Global, Europe, and Asia. The report includes profiles on the top 20 CSA providers included in the study. The report is used as a “buyers guide” for investment professionals and other users of commission management services. For additional information, go to www.integrity-research.com/cms/csareport/ or contact Matt Bannister at 646.786.6851 or Jim Kempski at 646.786.6865.


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