Over the past several years, with the market meltdown and the ‘flash crash” last May, overall commission dollars have continued to fall in capital markets. In 2010, commission dollars were down over 20%. There are projections of another ~20% drop in commissions for 2011 as well.
In the years leading up to the meltdown, brokerages had been reducing their execution costs to retain and/or grow revenues. A large shift to electronic trading, algos, and improved smart order routing shaved points off commissions rates and lowered the costs of execution.
However, in the past two years, execution isn’t the only issue. The buy-side is actively looking for “alpha-generating” ideas through better research. It’s been reported that more than 75% of buy-side firms use some form of commission sharing arrangement (CSA) to gain access to the research they need to lure retail customers back and improve the overall picture in capital markets. The other 25% is increasingly moving toward the use of CSAs as well.
Bulge bracket firms continue to invest in research and technology as full-service brokers, because they can afford to do so. The rest of the execution-only brokers will find it increasingly difficult to compete for commission dollars without research and CSAs to entice the “alpha seeking” crowd.
In the past two years, Firm58 has helped some of the leading brokerages create and manage CSA programs through our hosted technology solution. Our Software as a Service (SaaS) subscription model lends itself to institutional brokerages of all sizes because infrastructure and hardware costs are eliminated.
Firm58 is committed to continuing our focus on CSA program management. Recently, we added Mike Plunkett to our Board of Directors. Mike was President of Instinet, a company that had one of the most successful and longest-running CSA programs, ever. Mike’s insight into the market is already translating into actionable solutions for our clients and our company.
How well prepared are you to handle this need for more and better research? Learn more about our CSA/soft dollar offering.
We are pleased to announce our newest customer, Lightspeed Financial.
Recent industry research indicates that leading brokerages will be those firms that proactively manage service and measure costs across their trading relationships. Lightspeed Financial, a leading provider of direct market access trading technology, risk management solutions, and brokerage services for professional retail active traders and institutional investors, is an example of a leading brokerage.
Lightspeed Financial CEO, Stephen Ehrlich, says, “As a broker dealer with a sophisticated and growing client base, it is imperative that we employ equally as sophisticated and transparent services to manage our trading operations. By consolidating many of our middle-office functions with Firm58, we are able to accomplish those goals and achieve significant operation efficiencies in the process. This is a win for our clients and a win for us.”
We look forward to helping Lightspeed Financial continue to grow its firm and meet its post-trade goals. For more information about this announcement, please view the press release.