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October 14, 2009

Bernstein's New Frontiers

Research shop's trading comes of age

By James Ramage

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As long as times keep changing, the idea of reinvention will always be in style. One has to adapt to stay competitive in a cutthroat world. This is true for pop stars, politicians and yes, even brokerages. The traders at 42-year-old Sanford C. Bernstein have grasped this. And as the securities industry has changed to remain competitive, so have they.

Tom Wright, Sanford C. Bernstein

For decades, Bernstein's trading division shared the stage with its more famous sibling, investment research. And the trading desk profited from a relationship that directed customer order flow its way as payment for research's prized services.

But the trading environment for that model has changed. And the desk decided several years ago that it wanted to pull its weight and become an attractive destination in its own right. So Bernstein, a unit of the institutional firm AllianceBernstein, has since been making an effort to transform itself by adding an arsenal of new services for clients.

For one, it began committing capital for client facilitation. It has also recently introduced a derivatives group. And it's in the process of building a desk to trade in Asia. These latest moves follow in the wake of other substantial changes--augmenting its electronic services and adding sector traders--it's made over the past five years to broadcast its commitment to trading in the U.S., according to Tom Wright, Bernstein's global head of trading.

"It's this large investment and focus within the firm to make sure that trading is a key element of the value-add proposition overall of the firm," he said. "It's clearly paid off; we have been consistent share-gainers each of the last several years."

The changes are well timed. The evolution of the markets--and subsequent shrinking of commissions and institutions' broker lists--have forced sellside firms large and small to alter their business models for research and execution. And they've had to do so in the nuclear winter of a financial crisis that last year leveled competitors and customers alike.

In last year's annual report, AllianceBernstein painted a grim picture for the brokerage's business environment: more low-touch trading, more buyside-handled orders, lower subsequent transaction fees, lower commissions, continuing pricing pressure for traditional brokerage services and less overall volume expected from a battered customer base. A recent Greenwich Associates study piled on when it declared that U.S. institutional brokerage equity trading commissions could drop by as much as 25 percent from 2009 to 2010. That would put institutional commissions at $10.5 billion, roughly on par with 2007.


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