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February 1, 2003

Buyside Under Fire To Evaluate Brokers

By Peter Chapman

Controversial new trading guidelines from a respected industry organization are starting to influence how the buyside evaluates its brokers.

The Association for Investment Management and Research (AIMR) has suggested buyside desks consider using government-mandated statistics that measure small-order execution quality as a part of an overall transaction cost analysis program. It is one of several recommendations made in the AIMR trade management guidelines, which were published late last year [see Washington Watch].

The best execution metrics, required of market centers under Securities and Exchange Commission Rule 11Ac1-5, cover orders of less than 10,000 shares. Brokerages use the data when making small-order routing decisions.

Until recently, the buyside has largely ignored the statistics. Their orders, they argue, often in the hundreds of thousands or millions of shares, are too large to be subject to Rule 11Ac1-5.

One buyside manager complains that the AIMR measurement method is flawed. "There are holes in these statistics based on the order sizes and the sizes we trade in," Mary McDermott-Holland, head trader at Franklin Portfolio Associates, told the crowd at a panel discussion during last month's Security Traders Association of Chicago conference.

Nevertheless, Franklin intends to factor the Rule 11Ac1-5 data into its decision-making. "Our clients believe in AIMR," McDermott-Holland said. The trader expects third-party vendors will soon market Rule 11Ac1-5 data services to buyside desks. Indeed, Market Systems, which sponsored the panel and is one of two distributors of the data, says it plans to introduce a buyside product.