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November 8, 2005

The Incredible Shrinking Brokerage List

By Nina Mehta

Robert Gauvain, U.S. director of trading at Pioneer Investments, a Boston-based asset manager with $48 billion in assets under management, says his firm's research broker list has shrunk drastically since 2003. The firm now uses fewer than one-third of the total number of research brokers it relied on two years ago.

Gauvain notes that it has become increasingly important to quantify the value of the research provided by the sellside. He works with his firm's trade management committee to encourage greater analyst and portfolio manager accountability for the research budget they recommend. "We want to have as much transparency as possible into the value we're getting as a firm for research, whether it's from a traditional research provider or a third-party shop," he says.

Asset managers that rely on sellside research continue to pay for that research but are increasingly focused on execution quality. "We look at commissions in aggregate over a certain time period and try to hit targets without going outside our mandate of best execution," says the director of trading at an investment management firm with more than $250 billion in equities. "But on an order-by-order basis, that doesn't always dictate where we go."

The broker list at this trader's firm includes more than 200 brokerages. The list hasn't decreased in recent years but the trading desk now concentrates more business among its top 10 brokers. Two agency-only brokers also joined the top-10 list in the last two years, as the firm sought to lower costs.

The Gauge

Buyside traders are seeking to better gauge their brokers' execution strengths and weaknesses and to send them orders where they can add value. "If we want to compensate a bank analyst in a firm that specializes in the analysis of banking stocks, says Doug Hamilton, director of trading at Numeric Investors, "we'd look to trade those types of names with that brokerage firm because the likelihood of finding a natural counterparty is higher." Numeric is based in Cambridge, Mass., and manages $10billion in assets.

Numeric has reduced its broker list "north of 50 percent over the last four or five years," says Hamilton. Before 2000, the trading desk used 70-80 brokers. Now, he says, "the number of brokers used with any degree of regularity is 20-30."

While buyside firms have reduced their broker lists for many reasons, full-service firms typically aren't the ones being jettisoned from the lists. Efforts by sellside institutions to provide services in line with the profitability of each buyside account are also having an impact. Many buyside clients have decided "to concentrate their trading with certain brokers in order to be important to those brokers and continue to access the services they provide," says Marie Konstance, director of sales and product management at Plexus.