Commission sharing agreements (CSAs) can increasingly help Asian buy-side firms achieve best execution, according to a new report by financial research firm Celent.
Pointing to the rise of higher levels of algorithmic trading, DMA and smart order routing across the Asia-Pacific market, the report suggests that the region has developed an environment that could be receptive to greater use of CSAs.
Historically, CSAs have been relatively uncommon in Asia, partly due to the lack of clarity on how regulators would like the agreements to function. There have been no clear guidelines in Taiwan, Singapore, India and Korea, while other regulators such as Japan's Financial Services Authority have handled the issue cautiously, fearing a loss of business for smaller, domestic brokerages.
Nevertheless, the emergence of broker-dealers that only provide execution services has allowed the industry to migrate towards unbundling of research and execution, says Celent, since this ensures that execution-only brokers and research-only firms are dealt with fairly. Many Asia-Pacific jurisdictions are beginning to introduce best execution rules or guidelines that require portfolio managers to ensure they are getting the best deal for their trading and research needs.
“The Asian markets stand to benefit from the use of CSAs because they are expected to increase transparency and reduce the conflict of interest that exists when an asset manager pays commission to a broker that is engaged in both execution and research,” said Anshuman Jaswal, Celent senior analyst and author of the report.
Drawing on parallels with US and European markets in terms of fragmentation and use of advanced trading technology, the report states that CSA usage is related to wider market developments. Those developments are expected to follow the US and European pattern albeit on a slower basis because innovations based on technology will enter the marketplace more slowly. Within Asia, the report considers Hong Kong to be the leading market with regard to soft dollars, unbundling and CSAs.
The report also posits that the CSA model could evolve into more of a consortium model, under which several large firms would come together and appoint a single firm to manage an aggregated pool of CSAs. Alternatively, third-party CSA managers might be provided by a large commercial bank that is not already in the CSA or trading business, for example. Allowing a manager to have all their CSA balances in one place simplifies reconciliation and provides for an easier audit trail, greatly simplifying CSA usage for the end-client.