More Commissions Going to CCAs

Use of client commission arrangements is on the upswing. Not only have more institutions been adopting CCA programs, they’ve been sending more of their commission dollars through them, too.

Broker-dealer operators of CCA programs are reporting an uptick of at least 20 percent this year from last year in the overall payments the buyside has been sending through their respective commission management programs.

The upward trend of buyside CCA payments this year should continue, according to a report by Greenwich Associates. It said the total share of equity trading commissions that U.S. institutions direct to CCAs or traditional soft-dollar arrangements will climb to an estimated 20 percent in 2009, from 16 percent this year.

Total projected commissions generated in U.S. equities will amount to $12.2 billion this year, Greenwich reports. That’s up 18 percent from the $10.3 billion generated in 2007. The number was derived from the disclosed commissions of 255 institutions, and projected to a universe of 467 institutions in 2008.

“There’s no doubt that this [CCA] train is not getting pushed back in the station,” said John Meserve, chief executive of Westminster Research Associates, a member of BNY ConvergEx Group.

CCAs remain a hot topic, as not every investment management shop has adopted them. Still, buyside CCA use has been growing steadily since the Securities and Exchange Commission in July 2006 clarified commission dollar use for research and corporate access.

The Greenwich report anticipated that CCA adoption should grow to 47 percent of all buyside firms by the end of this year, up from 27 percent in 2007. However it attributes much of the growth to a shift from traditional soft dollar arrangements to commission management arrangements. Greenwich calculated that more than 60 percent of U.S. institutions have used traditional soft dollar arrangements as recently as last year. “The last year seems to have marked a peak period for institutions shifting from soft dollars to [CCAs] as a means of compensating third-party providers,” said Greenwich consultant John Feng.

The research outfit notes, however, that some of the uptick in CCAs is due to money managers redirecting their order flow away from their research providers, and not just out of existing soft dollar plans. The average money manager dropped 18 broker-dealers in the period covered, Greenwich reports. Large mutual fund companies have been the most aggressive, dropping upward of 30 broker-dealers from their trading lists.

For its part, BNY ConvergEx has seen this growth reflected in its CCA program. The firm has watched the amount of payments it’s making to other brokers for research grow about 20 percent over the first half of 2008 compared with last year, Meserve said.

Fellow commission management veteran Instinet expects 2008 to be a big year there for CCAs. It expects to pay about $40 million to research providers by the end of the year, according to Mike Plunkett, Instinet’s president of North American operations. That’s an estimated 28 percent year-over-year increase in the amount the firm expects to pay those research firms in its CCA program, he added.

The CCA business is going strong at Credit Suisse, too. Net revenues for its research exchange program will increase an estimated 60 percent in 2008 from 2007, according to Robert Boylan, a vice president with the firm.

And still more firms will be sending volume through CCAs in the near future, Plunkett added. They are the logical choice for the buyside to use to determine how and where it pays for research and executions, he said. “I do think that, over time, if you’re going to trade some shares, you might as well start to get some credits for it,” Plunkett said. “And if you can use those credits for just about anything in the research world, why wouldn’t you?”

In addition to rising CCA usage and broker payments, institutions are also executing CCA volume through electronic channels. According to the Greenwich data, slightly more than 35 percent of all CCA trade volume in 2008 “is executed via self-directed electronic means.”

This makes sense if about a third of all the trading volume is done using direct market access or algorithms, or in a dark pool, Meserve said. Such flow should be used now to acquire research, he added.

“People are taking their penny trade, adding a penny on top of it and capturing that penny to use for their CCA payments,” Meserve said. “So the first port of call, so to speak, for trading is the electronic venues.”

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