The bankruptcy of Lehman Brothers is changing the landscape for client commission arrangements (CCAs) in the US and commission sharing arrangements (CSAs) in the UK and Europe, according to Cogent Consulting LLC.
Cogent, a pioneering developer of industry commission management systems, said the buy side’s new fear of building up large research commission pools at any one sell side firm is raising concerns, resulting in:
• Leading institutional investors using a greater number of CCA or CSA brokers and allocating their commission pools with greater speed.
• Increasing focus on the protection and insurance of CCA or CSA balances.
• Eliminating the “aggregation” movement and the risks of having one broker manage all of an institution’s CCA or CSA money.
• Encouraging a greater number of brokerage firms to offer CCAs or CSAs to their institutional clients. Commission arrangements represent one of the biggest recent changes in the way investment managers pay for research.
Through CCAs and CSAs (approved by the SEC in the US, the FSA in the UK, and European regulators), investors can use commissions generated at best-ex brokers to pay their research providers. Under these systems, investors trade with their brokers and a portion of the commission they pay is set aside to pay for research. Brokers are then instructed to which third party research providers they should send payments. However, if all commissions are aggregated at one broker and that firm were to go out of business, its pool would likely be lost.
“Lehman sent shock waves through institutional money managers,” says Robin Hodgkins, president of Cogent. “In response, buy-side firms began looking for additional brokers willing to set up CCAs or CSAs. This is completely opposite to the trend over the lastseveral years of institutions paring down their lists of trading partners.”
Cogent’s market leading CSA Trak™ online platform greatly reduces the complexity ofsetting up CCAs or CSAs with a large number of sell and buy side accounts, making the process almost as simple as using an online checking account. As a result, Cogent has recently signed a large number of new sell and buy side clients, including:
• A nationally recognized provider of securities execution, clearing and direct-access floor brokerage services to institutional investors
• An agency “best execution” brokerage firm offering a state of the art electronic trading platform, NYSE direct access, soft dollar services, and compliance services
• A name brand institutional brokerage firm that specializes in identifying the most promising investment themes associated with growth companies
• A global brokerage, investment banking and private equity group based in the Asia-Pacific region• A nationally known institutional broker that provides anonymous order execution, proprietary ECN services, and out source trading and prime brokerage
• A leading global investment firm that offers high-quality research and diversified investment services to institutional clients around the world
D.C.