Buy-side firms are expanding their use of sell-side administered client commission agreements, or CCAs, beyond U.S. equities into international stocks and multiple asset classes to pay for third-party research and other services. The trend is a reflection of shrinking sell-side commissions and the need to unbundle the cost of executions from research.

With overall buy-side commission payments on the decline, buy-side firms are eyeing CCAs as a way to aggregate commission dollars to pay for third-party research, according to Jim Morrow, COO of CAPIS, an institutional agency broker based in Dallas. "We're seeing many of the institutions look for additional ways to acquire research," he says, explaining that as buy-side firms' commission payments diminish, there are fewer CCA dollars to allocate toward research.

As a result, buy-side traders increasingly are asking about expanding CCAs into new asset classes, including options, which has seen a recent surge in trading, Morrow reports. In addition, because of the tight commission environment, there is even buy-side demand for CCAs in the fixed-income market, he adds. But because there is no clearly defined commission on fixed-income trades, a CCA arrangement in this area is more difficult to structure.

Why the Interest in CCAs?

CCAs are taking off as part of an overall global buy-side trend toward consolidating broker lists and giving more order flow to core brokers to maximize the relationships. While hedge funds were the early adopters of CCAs, and mainstream asset managers followed suit, CCAs have exploded in the last 24 months, observes Michael Plunkett, president of Instinet North America.

Buy-side traders are asking, "Why can't I use the other asset classes to pay for research?" according to Plunkett. "That's where you get into options and derivatives," he adds.

"The next part of the evolution [of CCAs] is to pay out commission dollars in many asset classes," Plunkett continues. "Anything you can put an agency commission on, you should be able to use for these types of research," he contends.

"Asset managers participating in Instinet's Broker Share program began using the commission credits from options trades about a year ago," Plunkett notes. "If they already have commission management services from us, it just gives them another opportunity to build up credits in their account." Plunkett says Instinet will write $165 million in checks to pay research providers this year.

"The whole issue of using CCAs as a way to pay for research has mushroomed," agrees Robin Hodgkins, CEO and president of Cogent Consulting, a Summit, New Jersey-based provider of commission management software. "People are looking at other instruments as a way to increase the CCA pools that they are building ... to benefit the end investors," says Hodgkins. "There's no reason why you can't have a CCA relationship on any instrument if you monetize it."