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June 1, 2011

More Firms, More CSAs

Commission Sharing Arrangement Use Climbs As Buyside Needs to Pay for Research

By John D'Antona Jr.

The popularity of commission-sharing arrangements continues to grow among institutional money managers looking to pay for research. Today about three-quarters of long-only shops are using CSAs, and that percentage is expected to grow in 2011, according to a recent study by TABB Group.

Laurie Berke,TABB Group

The study shows that 76 percent of U.S. buyside firms use CSAs, and that the number is expected to grow 9 percent by year-end, said Laurie Berke, principal at TABB Group and author of the study, "Trading for Alpha 2011: CSAs in U.S. and Europe."

The reason for the rising CSA use is that the buyside wants greater freedom to trade wherever it wants, to ensure its research bills get paid. That is particularly important in a tight commission environment, as money managers look to leverage their commissions to get the most bang for their commission buck.

"CSAs make it much easier to pay for research due to their flexibility and transparency," said Mark Kuzminskas, director of equity trading at Robeco, a Boston-based money management firm. "CSAs are an integral component to our commission management practices and contribute to best execution."

The number of firms using CSAs has steadily increased in an environment of tight commissions. TABB's last report, in 2009, noted that 65 percent of U.S. long-only firms used CSAs, up from 58 percent in 2008. In 2007, only 40 percent of the buyside used them.

During this same time, Berke said, revenue from U.S. equity commissions in 2010 was $8.37 billion, down 21 percent from the $10.58 billion seen in 2009. She projected 2011 commissions will drop about 17 percent in 2011 from 2010 levels, to around $7.25 billion.

This drop in commissions is forcing the buyside to be more selective about its brokers, Berke said, adding that execution-only brokers will have a hard time competing for business. Consequently, the buyside is placing more value on getting alpha-generating ideas from its brokers, as the execution component of trading has become cheap and commoditized.

"The large global investment banks can afford to continue to spend on technology; they are full-service providers with research and investment banking, and they have a global reach," Berke wrote. "The execution-only firms will struggle unless they can buy or partner to give clients a reason to trade."

According to a June 2010 Greenwich Associates survey, 22 percent of commission payments on domestic stock trades were paid through CSAs. This was virtually unchanged from 2009. Greenwich's data on firms using CSAs is in line with TABB's. The percentage of U.S. institutions using CSAs increased to 54 percent in 2010 from 48 percent in 2009. Furthermore, "almost" 75 percent of survey respondents said they expected to have CSAs in place by the end of 2010.

Buyside Becomes More Selective