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"People are opening up five, six and seven of these accounts with core brokers, and it's an administrative challenge," says Mike Plunkett, president of Instinet North America. "No one wants to manage seven CSA accounts with seven brokers."
Instead of asking the buy side to use individual Web sites to manage each CCA, the new trend is commission aggregation, in which global brokers and other providers are looking to consolidate the commission credits in one place. For example, last fall Instinet launched T-Share, a program that allows institutional investors to trade with multiple brokers while consolidating their commission credits in their Instinet account.
Hypothetically, Plunkett illustrates, "If a trade is done with Goldman, Merrill and UBS, and if you have three or four [CCA] agreements in place, you can trade away from Instinet." The other brokers will send the credits to Instinet so the research credits go into one T-Share account, he explains. Clients can manage the research commissions through one front end, Plunkett says.
But are there confidentiality issues that could arise with commission aggregation? Are the buy-side head trader and the compliance officer comfortable allowing the firm's information to be aggregated in one place?
"We keep our [CCAs] separate by broker," explains Michael Groves, head trader at New Star Asset Management. "While there are brokers that offer to manage the whole commission process and redistribution [of credits to research providers], we prefer to keep our [CCA] pots segregated so that we avoid one broker knowing what we are paying away to others."
Like New Star, many asset managers may prefer to keep their commission credits with each executing broker rather than aggregate the credits into a lump sum, according to Cogent Consulting CEO Robin Hodgkins, whose firm provides an alternative solution. Cogent's software, according to Hodgkins, aggregates and centrally manages commission credits, but each commission pool remains with each broker.
While Cogent sees all of the information, the executing brokers don't get to see each other's commission balances, Hodgkins explains. "Clients often don't want to have all their information sitting with one firm, and the [research firms] you're paying don't want to have all their payments visible to one broker," he argues.
Since Instinet is not a research provider, that's less of a concern, concedes Hodgkins. But nevertheless, there's fear among research firms that a broker could reverse-engineer the firm's business model and go into that research business, he contends. Separately, the buy side wants to maintain a strong relationship with each executing broker, but if firms move the money to a central aggregator, this could create ill will, suggests Hodgkins.
According to Instinet, however, T-Share is gaining acceptance. "None of our clients have expressed discomfort with this setup," says an Instinet spokesman. Approximately a dozen institutions use the T-Share service, with several more close to coming aboard, he notes.
Ultimately, the success of commission aggregation will come down to trust and assuring the buy side and its compliance officers that there is no leakage of commission data. But as the number of CCAs proliferate and consumption of independent research increases, working with commission aggregators to automate the payment process may win out over privacy concerns.
