Mutual fund complexes which send orders to brokerages in exchange for marketing their funds, are likely to cease the practice.
That's the consensus among some buyside traders who say the change would benefit their trading desks. If firms ban the practice, these traders expect to have more discretion over their orders.
"This will happen across the whole industry," according to one buyside trader who requested anonymity. "It's clear from the work we are doing here." He added: "It means your need to pay certain people for sales activity is lifted."
By some estimates, at least 25 percent of all commission dollars spent by the fund industry is used to pay brokers for distribution. Already, two firms, Putnam Investments and MFS Investment Management, have indicated they would end the practice.
Within certain bounds, the practice is not illegal. But the Securities and Exchange Commission, in its investigation of the money management industry, has stated that many firms are violating those boundaries.
Also, last fall, the NASD fined Morgan Stanley $50 million for giving preferential treatment to 16 mutual fund companies' products in return for extra commissions. Morgan Stanley agreed to end the practice.
Some sellside desks, especially smaller ones, could be hit hard by a disruption in order flow. A.G. Edwards & Co., a prominent reseller of third party funds, is considered vulnerable.
A.G. Edwards head trader Dan Schaub, though, says he's not concerned. He says the percentage of his business tied to fund distribution has declined sharply in the past five years.
