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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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September 12, 2006

Buyside Traders Have Greater Discretion

By Gregory Bresiger

Buyside traders are becoming increasingly more important in the investment process, as they exercise greater control over where money management firms send their commission dollars.

One driver of this trend is mutual fund boards and their increasing scrutiny of commissions, according to one head trader at a money management shop. This scrutiny has made buyside traders cautious about who they trade with, how they trade, and, of course, the size of the commission they pay to their brokers, he said.

Consequently, this has essentially forced money management firms to grant their traders greater leeway in seeking best execution. "We no longer have a budget of who to pay, just guidance on who we should try to pay," one trader said.

The comments come at the same time as a new study by Greenwich Associates that documents crashing commission rates. The study, entitled "Electronic Trading Pushes U.S. Equity Commission Rates to Historic Lows," also found that the buyside trader now controls a larger part of the commission pie than do portfolio managers.

On average, buyside traders reported that they now control 38 percent of commission allocations, up from 33 percent in the previous year. "Among the largest institutions in the U.S, that proportion jumped from 36 percent to almost half," according to the study.

"Buysiders have more control over the typical transaction and this is a reflection of a greater emphasis of best execution standards," agreed one trading executive at a large mutual fund company.

As the markets and ways to trade become more complex, commented one buysider, money management firms need to rely on the expertise of the trading desk to fulfill best execution obligations.

The buyside trader pointed out that the increase in dark' or hidden liquidity in crossing networks has made his job even more specialized. "Traders are mission control," he added.

Still, another buyside executive said the continued push for best execution standards, along with fewer research chits, would also benefit agency-only brokerages. They are not only lean and mean, but able to prosper with deeply discounted commissions, compared to full-service brokers. Commission rates have dropped to some 4 cents a share in the last few years, the study found.