The Oasis reunion this summer is expected to be the most popular tour in British history, generating a reported £50 million payday for the Gallagher brothers as they reunite after fifteen years of what can best be described as some much needed time apart. Over that period, Liam has called Noel a “pouting potato,” while Noel has suggested Liam is “a man with a fork in a world full of soup”. Since they parted ways, Noel’s High Flying Birds and Liam’s Beady Eye have enjoyed decent success, but there can be little debate that a happy and enlivened Oasis are better together. A new generation are about to find out that Cigarettes & Alcohol might be cool after all.
But Oasis are not the only British phenomenon getting back together this summer. After almost a decade of unbundled markets, UK fund managers and their dealing desks have the chance to rethink how they interact with their brokers after an initiative from the UK government designed to try to reinvigorate equity research – and indeed capital markets – in this country.
After a delayed reaction ranging from ‘the genie is out of the bottle and we can’t put it back in again’ to ‘we’re waiting to see what so-and-so does before we do anything’, buy-side clients are finally appreciating the benefits of moving research costs off their P&L and pivoting to a joint payments model – something that is increasingly being seen by clients as their ‘ker-ching moment’ given the meaningful impact it will have on their margins.
Industry watchers suggest swathes of the buy-side are preparing to move back to CSAs in 2026 with a few big players phasing joint payments in from as early as July this year. The suggestion is the research wallet could lift by double-digits initially with more to come in later years. But we’ve a long way to go, confusion reigns and commercial sensibilities are high.
While the benefit of moving one of the single biggest line items off their P&L might be attractive to CEOs, COOs and FDs, the reaction from dealing desks has been more muted. The word ‘rebundling’ tends to trigger dealers, who immediately recall the bad old days of directed trades and fund managers leaning over their shoulders guiding them on which counterparty to use for the trade – regardless of whether it ensured the best outcome or not. One can already sense the shudders. But does it have to go back to that? Or is there a different path where the changes in regulation can benefit dealers as much as their investment teams?
Maybe you’re the same as me, we see things they’ll never see
While there can be no debate over the inefficiency of the majority of directed trades in pure execution outcome terms, another unintended consequence of unbundling was a fissure in the relationship between some dealing desks and their fund managers. With an obligation to follow best execution, dealers increasingly traded with counterparties the fund managers either didn’t know, didn’t understand or – perhaps more importantly – knew and understood, but couldn’t see the benefit to be gained by dealing with them. Some trading desks grew increasingly distant from the investment managers and a number were moved out of the investment team organogram altogether. The split meant some desks were seen in an operational capacity having previously been part of the investment process. Meanwhile, frustrated by the breakdown in the joined-up approach that had existed between fund managers and dealers for decades and with a new focus on saving explicit costs, other desks were outsourced altogether.
In short, in many instances the band had broken up. What had been a powerful way of rewarding brokers in a commercially viable way had fractured and then broken down altogether. Going solo was the only option and it proved to be tougher than expected.
Sing me something new
The shift in regulation by both the FCA and ESMA (which recently confirmed a similar approach to joint payments) should be seen as an attempt to bring the band back together. It could be seen to be recognition from the National Competent Agencies (NCAs) that the cost burden on the buy-side is too much and has had too profound an impact on the research market. Something has to change. Dealers can now work with investment teams to coordinate where their commission is going to go. With the operational aspects set up correctly, dealing desks have the chance to direct spending towards those helping their firm to achieve the best possible performance. In the same way that North American and sovereign wealth funds bundle their flow to reward those helping them with the best research, the best sales and spec sales calls (and the most compelling corporate access although we are yet to have clarity here on that topic) so UK and European fund managers are now empowered to ensure that those helping them to outperform their benchmark and their peers are compensated in a way that is commercially viable.
You can have it all but how much do you want it
The best execution requirement has not been shelved and must be adhered to above all else. Dealers must retain full discretion over where they trade, particularly in the instance of the more challenging trades where they can demonstrate their skills in sourcing liquidity in ever more complex markets. A key tenet of best execution is finding natural flow – but often there is no broker with the contra and the dealer is free to choose any broker to execute the trade. Of course some may be better at executing certain types of order, but in many instances dealers can direct order flow to those they want to reward, without risking execution quality. So as long as a broker can show it can be as effective as its peers in the realm of execution, then other factors could and should be considered by dealing desks when trying to decide who to partner on those valuable commission dollars – including considering who is helping their investment team to perform.
For context, if we consider commissions paid last year, the total wallet (according to Mclagan) was £2.4 billion in Europe, of which £536 million was paid via cheque to cover research and £1.87 billion through trading commissions. In the US, $5.3 billion was paid to the street, of which only $720 million was via cheque while $4.58 billion was funnelled through trading commissions.
In short, where you trade and who you trade with matters – a lot.
We want to help our clients make the necessary changes to realign those brokers they value for research, macro, charts and sales advice with those they use as trading counterparties. The new rules require an obligation to separately identify research payments (CSAs are seen as having advanced a long way beyond their excel spreadsheet days), but dealing desks will recognise they – alongside dedicated research management teams – have a huge part to play. Nobody wants to go back to the bad old days of directed orders and the frustrations they caused, but dealing desks can deliver best execution and still ensure their firm’s most valued brokers end up where they deserve to be at the end of each quarter, half or year. The best performing brokers will gain share, enabling them to invest in their research teams, meaning a ‘win-win’ flywheel will start spinning. Improved profitability will allow them to take a longer-term perspective and to offer essential research on UK and EU companies that have been starved of attention in comparison to their US peers.
For the fund manager, working with his or her dealing desk is going to be critical in establishing whether this change of regulation succeeds or fails. Recognising the value of the dealing desk and what they can add to each trade – as well as the investment process as a whole – remains paramount. Equally important will be working with the desk to ensure commission revenues are directed to the appropriate brokers. Only then will secondary market research return to commercial viability. And only then will capital markets in the UK and the EU have a chance of recovering their competitive position globally, with active managers receiving the quality of advice and service they need to outperform.
Can it work? Can the band get back together? Will Noel and Liam still be speaking after their first gigs in Cardiff in July? Will they still be performing at Wembley in September? Definitely… maybe.