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February 1, 2011

Buyside Drives the Bus

By Michael Scotti

Investment managers need ideas to differentiate themselves. They must make money for investors, and research gives them a leg up. Indeed, they'll pay for that advantage. And that's driving how money managers now compensate the Street. Today, a greater percentage of commissions pay for research since the commission downturn of last year. That's bad news for execution-only firms, since research chits get paid first. Consequently, many of these execution-only firms are getting into research. You can read about research's renaissance in this month's cover story, "Gotta Have It: Research's Importance Grows as Commissions Decline."

Michael Scotti, Editorial Director

Even the biggest firms are adding to their research. Barclays Capital is expanding its corporate access in the U.S. and global research. For BofA Merrill, it is looking to increase research in Asia, Latin America and parts of Europe, capitalizing on investor demand. With the rise of research, does that mean execution quality does not matter? Absolutely not. Money managers realize they can reap a much bigger gain from research than from even the greatest execution. That's why brokerages are responding to demand by adding research.

On the execution side, brokerages also are responding to buyside demand. The buyside has been in the dark about broker routing practices for some time. But that is changing. Working through the FIX Protocol organization, the buyside now has access to real-time execution information that it hasn't had to date. Buyside desks can get time-stamped executions, displaying where trades took place, as well as whether the order added or took liquidity. Some firms are also getting routing information. Two stories in this issue address this. One is a news story in our Inside Trading section. The other story, our Buyside Snapshot, features Franklin Templeton's David Lewis, who heads the firm's U.S. stock trading desk in Fort Lauderdale, Fla. The piece looks at the process behind implementing the program and what Franklin Templeton plans to do with the data to meet its best-execution responsibilities as a fiduciary.

The buyside's needs are also behind a new ECN to be launched by Credit Suisse in March. The name is not revolutionary, and maybe even tongue in cheek: Light Pool. Predatory trading strategies won't be tolerated in the new venue, according to Dan Mathisson, who heads the firm's electronic trading effort under the AES banner. Those high-frequency traders using short-term strategies will be removed. Call it an adult swim for long-term traders, if you like. Enjoy the issue.

Michael Scotti

Editorial Director


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