Buy-side broker selection remains squarely based on execution quality, but other factors are growing in relevance, according to Mark Denny, head of dealing - global markets, for Investec Asset Management.
One criterion that has gained growing prominence in recent months is the ability of brokers to manage potential conflicts of interest.
In November 2012, the Financial Services Authority (FSA) called for asset managers to attest their processes met current rules - in particular around payments for corporate access, which many traditionally paid for through broker commissions as research. According to Denny, the Financial Conduct Authority, which has taken on many of the FSA's former powers, is exerting pressure on brokers through its regulation of institutional investors.
"Conflicts of interest are a focus for all industry participants and we are very careful how we implement our trades where potential conflicts may arise," Denny said.
In terms of broker selection, Investec uses a six-monthly broker vote to allocate research spend between brokers, reflecting the views of portfolio managers and analysts on how sell-side research had added value to portfolio performance in the prior period. But broker selection for execution services is an entirely separate process, centred upon sell-side firms' competence in supporting the trade execution process.
Although factors such as risk appetite, access to key venues and range of execution algorithms and related tools are important, execution quality forms the bottom line in Denny's sell-side selection criteria.
Commissions, in particular, have become less of a differentiator in recent years as they have levelled across an industry struck by rising fixed costs and low trading volumes, forcing sell-side firms to price competitively to attract business.
"Commission rates are fairly competitive these days, so more important selection factors would be the broker's understanding of market structures and general transparency around that," Denny said.
The availability of crossing opportunities arising from the breadth of its client base and functionality of its internal pools is also a significant consideration in broker selection, he adds.
Denny says the insistence of brokers on routing orders through their dark pools in vain hope of price improvement has been a reason for Investec to reduce its broker list in recent years.
Softer influences on the broker selection process included trade press awards, either based on user polls or panel-based judgements.
"We do take notice of broker awards if they are from a reputable organisation and they often reinforce our confidence in the performance of our existing relationships," said Denny.