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May 16, 2007

More Wall Street Firms Get Less Love

The Buyside Continues to Trade with Fewer Brokers

By Michael Scotti

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Fewer brokerage firms on Wall Street are feeling the buyside's love these days in the form of trading commissions. More than half of the buyside firms using client commission arrangements, or CCAs, to pay for research have made deep cuts in their brokerage lists, according to a Traders Magazine survey.

In fact, broker lists are expected to continue to shrink as the buyside trades directly with fewer brokers, the survey reports. The anonymous, multiple-choice survey went to 1,576 buyside traders last month. The 100 firms that participated represent a 6.3 response rate to the 12-question survey.

Traditional asset managers accounted for 77 percent of the responses. Hedge funds accounted for 19 percent, and pension funds or endowments were 4 percent. Half the respondents work at firms with more than $5 billion in assets, with one-fifth of those at firms that manage more than $100 billion. The other half are managers with less than $5 billion.

CCAs are often described as the new soft dollars. A CCA allows a money manager to trade with a broker, who sets aside a portion of the commission and puts it in a manager's account. At the manager's direction, the broker then pays another broker or research firm that provides that manager with a service.

The buyside in recent years has been cutting its brokerage lists in order to trade with fewer brokers and to make themselves more important to the brokers whose relationships they value the most. CCAs have speeded up this trend by making the process more transparent and by allowing money managers greater flexibility to pay for research services.

Kevin Connellan, director of equity trading at Northern Trust Co. in Chicago, uses CCAs and thinks they are a win-win for the industry. Not only does he get to concentrate his business among fewer brokers, but the research providers still get paid and don't have the expense of running a trading desk. "This allows them to focus on their core competency of research," Connellan said. "Being on the receiving end of a check is not so bad and will actually help them to stay in business and help them to compete."

CCA Users

Clients who use CCAs represented 43 percent of the survey sampling, while 12 percent say they expect to begin using them by the end of the year. That means 45 percent of those surveyed aren't using CCAs and have no plans to begin using them by year's end. However, that does not mean they aren't using more traditional third-party agreements, formerly known as soft dollars.

The survey asked money managers using CCAs to reveal how many brokers they used before beginning the arrangements and after, with five possible ranges as responses: 1 to 30 firms, 31 to 50 firms, 51 to 100 firms, 101 to 200 firms, and more than 200 firms.

Just over half of the firms who use CCAs dropped the number of brokers they trade with by one or more ranges. What might be more alarming to the brokerage world, though, is that of that group, 90 percent still expect to trim their broker list "slightly." Only 10 percent appear to be satisfied with the size of their broker roster and will not trim their list further. Overall, 85 percent of the firms who dropped a grouping or more currently trade with the smallest possible group in the survey-30 or fewer brokers.