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March 1, 2000

Special FeatureFuture: Shock for Commission Payments System: A New Era for Soft Dollars? The SEC

By John A. Byrne and Sanford Wexler

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  • Special FeatureFuture: Shock for Commission Payments System: A New Era for Soft Dollars? The SEC
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Web-based brokerage systems may soon clean up the murky world of soft-dollar commission payments by institutional investors.

That's one view of the continuing love-hate relationship with the reputed one billion dollar soft-dollar industry.

In a business some describe as legalized kickbacks from broker dealers to institutions in return for institutional trade flows, that view is revolutionary.

With more brokerage services now on the Web, one expert says it won't be long until the vital research available through soft-dollar arrangements is eclipsed by online offerings from top-ranked analysts.

Call it pay-per-view research, says Harold Bradley, the outspoken former buy-side trader at American Century.

"The Net will enable the unbundling [of research and executions] because we now see [unbundled] executions taking place on super-fast ECN type venues," said Bradley, now a senior vice president at a strategic investment unit at the mutual fund giant in Kansas City. "Eventually you could have top-ranked analysts breaking away from major brokerages to set up independent online research houses."

Capital commitment, underwriting deals, as well as execution and research, the reason the buyside swarms to full-service firms, would take a hit on the execution and research side. Smaller brokerage firms specializing in soft-dollar services would similarly take a hit. Technology would break an old mold.

Bradley said American Century currently has about 25 fully-bundled brokerage relationships on an unpriced' arrangement for research. There are no give-ups', or splitting of commissions between trading desks and third-party research houses. There are no soft-dollars involved, he said. "Soft dollars hurt investors," Bradley protested.

As at most institutional firms, mountains of sell-side research material arrives via fax and even online every morning at American Century. This infuriates Bradley. "We get more than 2,000 pieces a week," he said. "The Street is using a firehouse approach. What I want are sprinklers on the dry side of my grass."

Bradley thinks his pay-per-view scheme would help eliminate this information overload.

While soft-dollar arrangements wouldn't immediately be affected, in the long run there could be a less compelling need to select soft-dollar brokerages on the basis of third-party and other bundled arrangements. "This research would still be prepared by the sellside," Bradley stressed. "But it would be delivered and charged for differently, perhaps on a pay-per-view arrangement."

Does Bradley's concept sound far-fetched? Many money managers do not protest loudly about soft dollars, in part perhaps, because they are using clients' commission dollars to obtain brokerage services.

David Gaynes, who runs Reuters Group's Instinet in the Americas, said most institutions, in general, look favorably on soft dollars. "If I am a fund manager and I pay you for a product in cash, that's money out of my pocket or bottom line," Gaynes said. "If I pay you with commission dollars, that's my customer's money. Most institutions will tell you that they'd rather pay soft if they can because that's the way all their competitors do it."