Agency brokers' market share of commission sharing arrangements (CSAs) is growing and has overtaken bulge-bracket investment firms, according to new research from Integrity Research, an investment research solutions provider.
Integrity's latest annual ResearchFocus report on CSAs, which polled 214 buy-side firms in the first quarter of 2010, found that nine out of 15 of the top-rated CSA providers were agency brokers. The remaining six places were filled by full-service investment banks. Around 38% of respondents also said they were most likely to trust agency brokers with their CSA pool, compared to 24% for bulge-bracket firms.
In the previous study, conducted in the fourth quarter of 2008, there were no agency brokers among Integrity's top-rated CSA providers.
CSAs allow buy-side firms to trade with brokers based on execution performance and keep a separate pot aside to pay research providers.
“Execution-only brokers gained share during the financial crisis, and commission management was no exception,” commented Michael Mayhew, chairman of Integrity Research and co-author of the study. “The challenge will be to preserve their recently won market share as the bulge-bracket firms rebound.”
Most respondents averaged five CSA providers, although larger investment firms were found to use 12 or more.
Over half (52%) of the survey's participants expect more unbundling of execution and research payments over the next 12-24 months. The study found that 30% of total research commission payments are directed via CSAs, with 25% of CSA payments allocated to independent research providers that are not affiliated with investment banks. The average equity commission paid by respondents – which included firms from Europe, the US and Asia – was $26.2 million in 2009.
Instinet was ranked highest among CSA providers by overall customer satisfaction followed by Knight and Convergex. The three most significant factors governing choice of CSA providers were customer support, back-office quality/trade reconciliation and counterparty risk/financial strength. ConvergEx topped respondents' ratings of customer support, ITG ranked highest in terms of financial strength and Barclays led back-office quality ratings.