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October 14, 2009

Bernstein's New Frontiers

By James Ramage

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Back in 2007, the industry braced for the potential impact of client-commission arrangements, a payment mechanism for buyside firms whereby monies are held by brokers for eventual payment to the money managers' research providers. Industry pros predicted that CCAs would ultimately consolidate equities trading into the hands of the bulge bracket and a few others. In turn, research would increasingly get paid through CCAs, and few would trade with the research houses' trading desks.

But it hasn't really worked out that way.

CCAs did hurt the smaller brokers, Wright said. For those further out on buyside broker lists, CCAs consolidated the execution side of the business. But Bernstein wasn't among those numbers, he added.

"Were we concerned about CCAs back when they came out? Yes," Wright said. "But that has passed, at least for us. If you consider where we are, they did not disenfranchise our trading business. Given our size and scale--and importantly, given the timing of the investments we made--we're winning business based on our trading expertise, not just our research."

The firm's 10-K reported that revenues for Bernstein's execution and research services in the U.S. and Europe rose almost 13 percent from 2006 to 2007, and 11.4 percent from 2007 to 2008. Over the two-year stretch, revenues jumped to about $472 million, from about $375 million--almost a 26 percent increase.

Bernstein's European research and trading averaged about 22 percent of the firm's overall revenues for the period between 2006 and 2008. The overseas electronic business has been the primary driver of revenue in Europe, Wright said.

AllianceBernstein, though, does not separate the brokerage's execution revenues from those it earned from research. And while Wright would not disclose trading revenues, he did say that the volatility the crisis unleashed increased the high-touch volume the firm's traders saw by north of 50 percent during the second half of 2008. And he likes what he sees going forward.

"We think we're positioned extremely well," he said. "We feel like this is a very good time for us. Clients are responding very favorably to our trading platform."

Others agree. Jay Bennett, managing director at Greenwich Associates said that Bernstein research gets great ratings from its clients and a significant share of the broker vote. Their new execution services should bring them more customer interest.

"Their opportunity, clearly in some of the moves [under discussion], is to make sure that they provide all avenues in order to get paid for that vote," Bennett said. "The institutional community likes to deal with them. They just need to make sure they can facilitate the trading side as much as clients would like them to."


The Five-Year Plan

Bernstein brought in Wright from Merrill Lynch back in the summer of 2004 to place the firm's trading operations under direct management and guide its strategic changes. Out of the gate, the firm bulked up its electronic trading services--particularly in single-stock algos and program trading. Bernstein then closed down its New York Stock Exchange floor operation in that period and upgraded its platform to an upstairs, sector-focused desk. It currently has 11 sector traders, Wright said. The firm also stepped up its investment in London for the European program trading business.