The percentage of commission dollars earmarked for client commission arrangements (CCAs) or commission-sharing arrangements (CSAs) is set to increase substantially in the next couple of years at some of the bulge-bracket firms.
According to projections from executives at Merrill Lynch and Goldman Sachs, trades done pursuant to the popular soft-dollar programs could rise from about one-third today to 50 percent or 60 percent in the coming years.
“The trend is quite robust,” Michael Bird, who oversees commission management for the Americas at Merrill Lynch, told a gathering of research executives recently.
The major trading houses have set up CCAs and CSAs in the past year or so to enable the buyside to trade with them but pay other brokers for research. They account for about one-third of all flow at Merrill, according to Bird.
Goldman Sachs also reports taking in about one-third of its flow in the U.S. and U.K. because of its CCA/CSA programs.
Tom Conigliaro, responsible for Goldman’s soft-dollar programs, told the crowd at a conference sponsored by England’s AQ Research and New York’s Integrity Research Associates that the Securities and Exchange Commission’s interpretive release covering Section 28(e) of the Securities Exchange Act of 1934 last year was driving the trend.
“It created flexibility in the way brokers can structure the types of arrangements the buyside is looking for,” Conigliaro said.
The exec added that the buyside is discovering many new and innovative research products, but is having difficulty finding ways to pay all the providers. “These [CCA/CSA] structures make it easier for the average manager to pay these providers,” Conigliaro said.
Still, a least one brokerage is seeing CSAs being used to pay more for research from full-service brokerage houses and less from traditional third-party providers. That’s according to Kevin Petrello, a Lehman Brothers’ senior vice president in charge of commission management.
Petrello also noted at the AQ/Integrity confab that money managers that previously weren’t using third-party soft-dollar programs are signing up for CCAs/CSAs. “They are more comfortable in the CSA world,” Petrello said, “and are asking to pay for broker-dealers.”
The large trading houses such as Goldman, Merrill and Lehman may be reveling in the popularity of the soft-dollar programs, but those research providers with trading operations may be in for troubled times. As more trades are consolidated with fewer broker-dealers, small and mid-tier broker-dealers could be forced to close their trading desks.
“Much of the excess capacity will be removed from the system,” Charles Gepp, Reuters global head of research, noted.