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May 26, 2005

Soft-Dollars, Rating Research

By Peter Chapman

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The prospect of soft-dollar reform is a tonic for one software shop. Cogent Consulting has watched sales of its broker vote' software double in the past 12 months as buyside customers prepare for new soft-dollar rules. Fund managers expect the Securities and Exchange Commission to propose new rules this year, requiring them to provide more commission allocation disclosure.

Cogent sells a package called ResearchTrak Broker Review and Voting System. The software allows money managers to rate the services brokers provide them, as well as assign a dollar value to the brokers' research. The vendor says it has 20 buyside customers - including some of the largest names in the business - using the software. That's an increase from 12 months ago when it had 10.

The technology is used by portfolio managers, analysts, traders, operations staffers and others to grade the quality of brokers' services. These votes determine the rankings that allocation committees follow to divide their commission pie.

Cogent's ResearchTrak is the most widely used broker voting package in the U.S., analysts say, but it is not alone. Britain's Rontech, regarded as the biggest player on its home turf, is trying to make inroads in the U.S. Eze Castle sells a commission analysis system with a bare-bones voting module. Financial Sockets, a firm with 11 employees, sells the BrokerSelect platform.

Traders Magazine technology editor Peter Chapman sat down with Cogent's president, Robin Hodgkins, to discuss the direction of soft-dollar reform and the use of ResearchTrak.

Traders: My sense is that the industry expects three outcomes from the SEC's latest probe into soft-dollar practices. The regulator will fine-tune the definition of which products and services qualify for soft dollar payments. It will require better disclosure of commission allocation decisions. It will decide not to distinguish between third party and proprietary research. How do you see it?

Hodgkins: Judging from [SEC Chairman Bill] Donaldson's comments and in talking to some of the soft-dollar brokers, there is a definite feeling that proprietary and third-party research will be treated on par. Donaldson sees no reason to treat one any different from the other.

Traders: And the services?

Hodgkins: The list of items eligible for soft dollars will probably be tightened up somewhat. The SEC will zero in on the classic discussion of subscriptions versus hardware. Is a Bloomberg terminal, for instance, considered hardware or research? Bloomberg says it is research. Its competitors say it is hardware and so it should not be eligible.

Traders: And disclosure?

Hodgkins: Disclosure is critical. Our customers and prospects are pleased that soft dollars have been given...if not a green flag, then a yellow flag. That they will be allowed to continue. They will be given better guidance as to the level of disclosure that will be expected of them.

Traders: I gather the latest development in the soft-dollar saga is that the clients of the money managers - the pension and mutual funds - are getting pressure from their boards and the regulators to become better informed as to the commission decisions of their money managers. What are you hearing?