Cowen Unveils Wrap Trading Utility
Traders Magazine, April 2012
Buyside traders have a new tool that should make it easier to transact their wrap business. Cowen & Co. has introduced a product that gives greater leeway in finding liquidity, while fulfilling their best-execution obligations.
The upshot is that Cowen's utility not only makes the buyside's life easier, it also puts wrap investors on a more level playing field with institutional accounts. It does this by allowing asset managers to trade with whichever broker they choose, rather than sending the wrap portion of an order to be traded in a rotation after the institutional part.
The new product, called Cowen 360, is used in the back end of the trade for clearing and settling. This relieves the buyside of the obligation to trade with the sponsoring broker that gathered the assets.
Estimates place the wrap industry at about $2 trillion in assets under management. Mark Viani, managing director for the electronic products group at Cowen, sees opportunity for his firm by providing this solution.
Cowen 360 allows asset managers to execute managed account orders with the broker of their choice, so retail investors can get best execution just like institutional investors.
"Our wrap business helps retail customers get the best execution they can and use the same tools used by institutional clients," Viani said. "We want to change the managed account industry."
A managed "wrap" account is an investment account held by an individual investor and looked after by a professional money manager. In contrast to mutual funds, which are professionally managed on behalf of many mutual-fund holders, managed accounts are specially tailored investment plans designed to meet a specific investor's needs.
Cowen 360 allows registered investment advisors (RIAs) to execute their wrap orders with the best-execution broker of their choice and pay a commission. The executing broker simply settles with Cowen via the Depository Trust Clearing Corp. Cowen automates the step-out process to the various wrap sponsors at a net price that includes the executed price, commission, and operational fee. Viani said Cowen guarantees the trade to the executing broker and sponsors and matches on T+1, avoiding any issues.
"We're the middleman here," Viani said. "We don't ask for the trade but take delivery from the executing broker as though we are a temporary custodian and in turn deliver to the asset gatherers."
Viani said Cowen settles the trade with the executing broker at the execution price and commission. The utility also bundles Cowen's operational fee and delivers the step-outs at a net price. Each one of the asset gatherers (sponsors) receives the same price, eliminating dispersion among similar managed accounts. That's because 360 eliminates the need for rotating the execution queue, which creates different execution prices for wrap clients.
Those selling points matter to asset managers such as Thompson, Siegel & Walmsley in Richmond, Va. Chip Coleman, director of trading at the firm, told Traders Magazine that getting all his clients into a trade and eliminating so-called rotation and price dispersion makes it more efficient to meet his fiduciary responsibility for best price.
"Using 360 eliminates the need to rotate between directed and non-directed business," Coleman said. "It allows us to give all our clients opportunities to interact with the market at the same time."
And getting client orders filled with the best-executing broker first and then others is a major challenge for Coleman and other investment advisors.
This is commonly called the "rotation," and the style of rotation is chosen by the advisor to be what they feel is fair and equitable, with no sponsor always being first.
With Cowen 360, all fees are disclosed to the RIAs, enabling them to keep track of commissions and fees paid. In addition, multiple broker executions can be aggregated into one average step-out price.
"With (Cowen's) help, we're able to group that order together and trade for all our clients at the same time, making it easier to achieve our price points," Coleman said.
Cowen's Viani said 360 makes wrap trading like traditional institutional trading. "In this, the RIA can employ multiple execution venues such as dark pools, crossing networks and multiple brokers to get their best-execution mandate fulfilled," he said.
Robert Glownia, head trader at RiverFront Investment Group, also based in Richmond, said being able to electronically upload his post-trade sponsor allocations to Cowen rather than sending them manually to multiple broker platforms is a plus.
"We can simply upload a file to the Cowen 360 system that efficiently communicates our trade details and allocations to our numerous sponsor firms," Glownia said. "Moreover, we can leverage Cowen's team to handle common trade breaks and other discrepancies during the trade-matching process, allowing us to focus our resources on more value-additive projects."
That matters to RiverFront because it trades with 13 different sponsors. By using Cowen as a post-trade clearing house and matching up its trades, Glownia saves time and can focus on trading.
This is how it works: Cowen, as a central clearinghouse, aggregates advisors' orders and executes them away from the sponsor's desk. Executions will then be "stepped out" to the sponsor for settlement. Typically, executing brokers will trade the orders and step out at the executed price, incurring the cost of trading but making no revenue.
However, the broker could also mark up or down the executed price, making itself a profit. The issue with a markup or markdown is that the profit may not be fully disclosed.
Cowen does incur risk on the trades it helps facilitate by taking delivery of the securities. For that risk, Cowen charges a small fee embedded in the step-out price.
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