Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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September 28, 2006

Explaining CSAs and Soft Dollars

By Gregory Bresiger

Soft dollars and commission sharing arrangements (CSAs) have often been confused because they are similar, says William Edick, a Washington-based attorney who works with soft-dollar brokers.

Soft dollars is a broad term that people often incorrectly use, Edick says. An example of soft dollars is when a money manager purchases research products that will assist the client. A manager promises to execute with a certain broker, who earns a commission and pays a third party for the manager's research services. The third party has no connection with the broker.

This is not a commission sharing arrangement because the broker is not splitting a commission. The broker is paying one of the manager's bills in exchange for the executions. It is a soft-dollar arrangement.

CSAs are similar but not the same as soft-dollar relationships. Here a money manager finds a broker who is very good at execution. The manager also works with a second broker who is good at research, but doesn't have a top-notch trading desk or technology.

"The first broker will share some commissions with the second broker, who will provide research to the money manager," Edick says. "This is a subset of soft-dollar arrangements, but it is slightly different."

Since 1976, the SEC has considered clamping down on CSAs, along with soft dollars. That's because they were similar in nature to give-ups, which the SEC outlawed in the 1960s.