US buy-side traders are looking to new solutions to split commission payments between bulge-bracket brokers for execution and niche research providers, as smaller brokers refuse to sign commission sharing agreements (CSAs).
CSAs, whereby executing brokers pay a portion of the commission received to a research provider specified by the buy-side client, are growing in popularity. But, some smaller US brokers refuse to accept payments just for niche research and require clients to also execute trades with them.
Eugene Choe, co-head of Advanced Execution Services (AES) at Credit Suisse, told theTRADEnews.com the buy-side is looking to other options to balance niche research with bulge bracket execution, which is in part linked to greater attention paid to bundled broker commissions, known as ‘soft dollars’.
“Soft dollar programs come in for a lot of scrutiny in the US and market participants want to avoid that scrutiny. The role of CSAs is different from Europe – many US broker-dealers don’t want to be paid by cheque through a CSA and instead want to execute directly for the buy-side to maximise revenue,” Choe said.
The solution put forward by Credit Suisse to tap this growing market is its Best Broker Execution (BBX) system, whereby smaller brokers receive execution and research commission, but the buy-side trader can execute using Credit Suisse algorithms for which the firm receives a fee.
“For a niche broker-dealer that doesn’t accept cheques and wants to avoid soft dollar programs but doesn’t have the execution quality you require, this lets the buy-side trade and settle with that broker-dealer while executing through Credit Suisse,” Choe said.
The BBX solution lets users tap into Credit Suisse’s suite of execution products via its AES platform.
CSAs have facilitated a shift from ‘bundled’ broker services and let the buy-side tap into independent research while still benefitting from the advantages of bulge-bracket execution services.
In Europe CSAs have become more popular than in the US, driven in large part by regulation. Most recently, UK markets watchdog the Financial Services Authority has pushed for clearer separation of execution and research to avoid conflicts of interest and overspending by buy-side firms.