Following up on my last blog about commission sharing arrangements and client commission agreements (CSA credits), I wanted to talk about some of the unexpected consequences (or requirements) that fall out of offering these arrangements. Nothing here is bad or problematic, unless you don’t understand it or are ill-prepared to address some additional client needs.
Based on recent news in the trade press and feedback from recent meetings, it appears that commission dollars and volumes for some agency broker dealers are starting to grow again. That’s good news. We think it’s driven in part by the use of Commission Sharing, CSA agreements and the access to new research.
However, this also has another consequence. Clients want to view their unbundled execution costs, seeing how much they are paying for this research as well as having greater transparency into their execution costs. In fact, it’s clear that clients are asking for cost-plus arrangements.
What does this mean? Well, in order to maintain that client, you’ll need to systematically calculate the specific costs of each trade, including maker/taker fees, complex exchange fees, SEC fees and other charges. Clients now expect you to charge them these explicit fees with an agreed upon mark-up. No longer can you charge the typical $0.04-$0.05 all-in commission fee.
The moment you fail to show these explicit costs and verify the mark-up, you’ll lose those clients and commission dollars to the next broker-dealer who can. You’ll have lost a client and wasted the resources that acquired in the first place. Even as commission dollars begin to rise, no one wants to take for granted a client relationship and lose it simply due to their inability to provide transparency and cost-plus billing.
Are you prepared?
Today, Traders Magazine Online posted a story by John D’Antona Jr, entitled “Buyside Wants More Transparency of its Orders.” According to the article, “traders expressed these views on order routing disclosure on a panel at last week’s Investment Company Institute’s conference on equity trading in New York.” They go on to say that “daily disclosure of trading and routing data is fair and reasonable.”
So why hasn’t the sellside provided this information to their trading clients? The sellside firms generically referred to in the article claim that “[t]racking orders can be an arduous and time-consuming task…getting data from all the trading venues can increase the likelihood of information leakage, which compromises brokers’ desire to maintain customers’ privacy.” I think that argument has little merit. I believe the reason why sellside firms cannot provide, and do not provide this information is because they don’t have the middle office in place to capture, normalize and provide secure access to their buyside clients.
Brokerages need to provide this access and flexibility in order to keep its client base and protect revenue. The buyside wants to use this information, in part for compliance to see “where brokers receive rebates…[to] determine if the brokers are meeting their best execution obligations.” Those brokerages who do not provide daily access to this information risk losing their trade flow. As important, transparency and compliance obligations are growing and I can foresee a world very soon where in near-real-time, brokerages will have to make available this information to it’s customers.
It’s time for brokerages to quit limping along with outdated and ineffective spreadsheets and invest in technologies that have been around for the better part of the last decade. Falling behind isn’t an option.