March 1, 2014

Inside the Broker Vote

By taking control of its commissions and judging the research it receives, the buyside increasingly is using its broker vote to decide which brokers to trade with and how much to pay. It's a whole new competition, and the brokers are eager to please.

By John D'Antona Jr.

Research drives the trading bus.

Now, research is fueling the bus, too-not just determining where an institution trades, but how brokers are getting paid, as well. In this new landscape, the buyside is adopting more sophisticated methods in how it decides which brokers it trades with and eventually how much they pay. For the brokers, the stakes are high. How much and how often a broker gets paid can mean the difference between life and death for a broker and their brokerage firm.

So what is the broker vote?

Nanette Buziak, managing director and head of trading at ING Investment Management in New York, told Traders the broker vote is basically a report card the buyside gives the sellside. In this process, the traders grade a broker's research and the corporate-access content provided to the buyside.

Last January, John Caron, director of equity trading at Loomis, Sayles & Co., took Traders inside how his trading team rates their broker-dealers. The asset manager's portfolio managers and analysts vote on the brokerage/research houses that help out the most on a daily, weekly, monthly and quarterly basis. "If we are going to add a broker-dealer to our approved trading list, they need to exhibit some types of advantage over brokers we already trade with. If they don't meet that requirement and have received votes from our PMs and analysts, they would potentially be paid through a CCA," said Caron.

"My traders only have to concern themselves with what broker to execute with, as all the research payments and client commission arrangements (CCA) allocations get done behind the scenes, which helps to eliminate any conflict of interest," Caron added.

And the sellside-which is seeing incoming commission dollars shrink steadily-is taking notice. Big time.

GROWING IMPORTANCE

What is driving the importance of the broker vote process? Simply, it's the economics of the current market environment of low volume and shrinking commissions. The buyside has fewer dollars to spread around the brokers for execution and research and wants to pay for the services it uses and places the highest value on.

Back in the heyday of the equity markets, in 2009 and 2010, very few firms conducted a formal broker vote as to how they allocated their commission dollars. As Doug Bantum, managing director of WallachBeth's head of equity research sales and Trading and overseer of the firm's broker vote ranking, told Traders, back when commissions were abundant, brokers could just insert a research analyst in every vertical and get paid.

"That was a good-time scenario back then," Bantum said. "Now, you have to be really good, focused and differentiated to get on the vote and get paid. Back then, shops were built for good times, but when commissions shrunk, no one could support that structure anymore. Now, you have to be that much better these days to get a shrinking piece of the pie.

Market research firm Tabb Group reported that in 2013, U.S. equity commissions were approximately $12 billion, while in 2012 they were $12.1 billion. This compares with $13.8 billion in 2011. In 2010, U.S. equity commissions were $14.8 billion.

Adam Sussman, partner and director of research at Tabb Group, said that as a result of the shrinking commission environment, buyside institutions are "fine-tuning" their broker vote processes.