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Fidessa's Steve Grob has written a response to Marcus Ferber writing to ESMA condemning periodic auctions. The blog strongly criticizes Ferber's approach, and looks at the problems behind the "lit is good and dark is bad" attitude.

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February 1, 2004

Soft Dollars and Best Execution

By Nina Mehta

One controversial regulatory change under debate could have benefits for best execution, say some trading pros. It could also give the partnership between traders and portfolio managers an unintended boost.

If soft dollars are eliminated or scaled back, buyside traders would have more discretion over order flow. "Then we wouldn't have to trade with particular brokers," said Paula Peter, manager of equity trading at Pittsburgh-based Mellon Private Wealth Management. "We would more actively pursue alternate sources of execution, controlling more of the execution on our desk."

Abolishing soft dollars could also improve the partnership between traders and portfolio managers. "Getting rid of soft dollars would be one of the best things that could happen in the relationship between traders and portfolio managers," said Chris Orndorff, a managing principal at Payden & Rygel Investment Management, a money manager in Los Angeles with $50 billion. "Then you'd have traders truly trying to make the best execution, rather than seeking best execution and yet at the same time knowing they must feed the soft-dollar broker." He noted that those are typically contradictory efforts.

Ted Aronson, a partner and portfolio manager at Aronson+Johnson+Ortiz LP (AJO), places the burden squarely on the shoulders of portfolio managers. "What good is a competent trading desk if a manager is tying the hands of traders with soft dollars, requiring them to direct commissions to certain brokers?" he asked. AJO, which, like Payden & Rygel, does not use soft dollars, has $15 billion under management.