Its Not Just about the Ex


New York – In a June 11, 2007 Pensions and Investments issue some of the execution data and analysis caught our attention. The top line results, discussed in an article entitled “Familiar Names Lead Best-Execution List” indicates that Morgan Stanley, Rochdale, Goldman and Fidelity are at the top of the overall analysis of best execution.

In a section entitled TRADEWATCH data was presented which covered of about 7 million trades in the year ended December 31, 2006. Initially the analysis splits the trades into small trades (10,000 shares or less) and large trades (over 10,000 shares). Each of these is then further segmented into 1) full service brokers, 2) execution only brokers and 3) research/specialty brokers.

Because of Integrity’s interest in research, the third category (Research/Specialty Brokers) is the most interesting and is the focus of this entry.

In the small trades area, the top ten firms were:

1.   Raymond James

2.   SunTrust Robinson Humphrey

3.   Abel/Noser

4.   Autranet

5.   Janney Montgomery Scott

6.   BMO Capital Markets

7.   Pershing

8.   Friedman, Billings, Ramsey

9.   Morgan Keegan

10.        Hilliard Lyons

For the large trades group, the winners on best-ex were:

1.   Rochdale

2.   Pershing

3.   AG Edwards

4.   SunTrust Robinson Humphrey

5.   Jefferies

6.   BMO Capital Markets

7.   Gerson Lehrman Group

8.   Wachovia

9.   Friedman, Billings, Ramsey

10.        Lynch, Jones & Ryan

Note: One interesting side note is that both AG Edwards and Wachovia – which bought AG Edwards in the spring of 2007-are in the top ten.

Calculation of best-execution is measured by the Plexus BrokerEDGE transaction database and compares execution to the Plexus Average Execution Gain/Loss benchmark.

From our point of view, a review of the above data begs the question “Is there any correlation between best-execution and best research?” Investars performance data can be used to assess the synthetic performance of a research company as if an investor had taken all of the recommendations of that company and acted on them.

There is not a perfect overlay of companies for which we have both execution data and the performance data, but we present below the rankings of the firms for which we do have overlapping information sets. In the second column we present the rank of the firms that appear in the best-ex Plexus list and in the second column we present the rank in the research performance database of Investars.

Small Trades Group

Company Execution Rank Performance Rank
Raymond James


38 of 140

SunTrust Robinson Humphrey


122  of 140

Janney Montgomery Scott


126 of 140

BMO Capital Markets


124 of 140

Morgan Keegan


68 of 140

Hilliard Lyons


7 of 140

Large Trades Group

Company Execution Rank Performance Rank


52 of 140

AG Edwards


70 of 140

SunTrust Robinson Humphrey


122 of 140

Jefferies & Co.


20 of 140

BMO Capital Markets


124 of 140

Depending on how one weights the importance of execution and/or research in the analysis the top firms in research and execution may vary. We base our analysis solely on inspection. By this rough gauge, it would seem that the top firms as in the Research/Specialty Group are Hilliard Lyons or Raymond James for the small trades group, Rochdale or Jefferies for the large trades group.

Note: Integrity is currently in the process of authoring a report on the small cap research company space.

Comment by Bill George:
I also read this article in Pensions and Investments. After doing so I felt the article and the reported results were so very important as documentation dispelling some of the urban myth and misunderstanding surrounding best execution I sent a “Letter To The Editor” of Pensions and Investments emphasizing what I thought was a very important point which was revealed in the supporting data published with the article. My “Letter To The Editor” was published in the June 25, 2007 edition of P&I on Page 10. For your convenience I’ve included the text of my letter below:

Letter to the editor of Pensions & Investments

Best Execution Insight

I congratulate Pensions & Investments for including the article “Familiar names lead best-execution list” by Isabelle Clary (June 11, page 12).
The article and the accompanying chart listing brokerage firms that were at the top of their peer group in execution quality provides valuable insight into the multidimensional nature of execution quality. The article and the accompanying chart also provide evidence that execution quality can be a subjective attribute dependent upon the capitalization range of the stock traded, the liquidity of the stock issue as well as the specialization and the unique skills of the executing broker and the individual skills of the executing trader.
Execution quality (or “best execution”) promises to be an increasingly important area of fiduciary oversight. There is currently quite a bit of confusion and some widely distributed misinformation about what best execution is and where it can be found. I believe articles such as Ms. Clary’s may assist fiduciaries to understand the complexity of best execution and the subjective characteristics a buy-side trader must consider when making broker selection decisions, and when allocating trades to brokerage firms and traders for execution.
Thank you,
Bill George


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