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Virtual Aggregation Gains Momentum as Buy Side Looks to Consolidate Commission Relationships

Buy-side firms are demanding that their sell side partners utilize a single location to aggregate their commission credits, according to Markit, which offers a single portal for commission management.

Demand for virtual aggregation of commission payments has been growing as asset managers seek a standard way to manage and allocate commission credits across multiple executing brokers through a single location.

Rather than going through the administrative headache of visiting multiple web sites for each broker, clients can benefit by going to one portal to view all of their CSA balances, trades and invoices.

Last week, Hobart Capital Markets LLP, a UK-based agency broker said it partnered with Markit, the global financial information services provider, to use its commission management solution for buy side customers, signaling the trend toward virtual aggregation.

“Our product is what I would describe as virtual aggregation. We’re not a broker, we don’t take client money and we don’t write the checks,” says John LaVecchia, managing director at Markit who oversees the firm’s commission management, broker vote and calendar systems.

Markit’s commission manager enables the buy side to maintain commission credits with their brokers and use these credits to pay for research, execution and other permissible third-party services under section 28(e) of the Securities Exchange Act of 1934. The SEC issued guidance on CCAs in July of 2006. “The advent of CCAs allows them to separate where they do their trading and how they pay,” said La Vecchia, referring to the unbundling of commissions.

Interest in virtual aggregation has skyrocketed with the growth of commission sharing agreements (CSAs) in the UK and client commission arrangements (CCAs) in the US, allowing asset managers to separate the cost of trading from their research payments. In 2011, Tabb Group published a report on CSA trends, saying the buy-side is better positioned to solve the complexities of commission management based on recent advances in technology and services. Aggregation technology is cited as one area of advancement since it allows the buy side to trade with many as counterparties as possible by building CSA balances with each of the brokers while simplifying management of those balances.

“This allows customers to execute trades via Hobart and track and manage commission payments via Markit, safe in the knowledge that they have adhered to best practice,” commented Simon Gamse partner at Hobart in the release. Hobart, an execution only brokerage house, executes on over 60 markets and alternative liquidity pools globally. It uses FIX, sophisticated smart order routers and up-to-the-minute algorithmic trading engines to manage customer orders, assist in price discovery and access liquidity while maintaining anonymity and minimizing market impact, according to the release. Citing his firm’s “robust infrastructure and secure IT capability,” Gamse notes that“clients can take advantage of Hobart’s UK and European execution capabilities and leverage Markit’s Commission Manager platform in order to manage and allocate commission credits efficiently.”

But the platform is not exclusive to Hobart. The firm’s clients have the choice of executing through other brokers too, according to Markit. “If Hobart’s buy side clients are executing with other agency brokers on our CSA platform then those buy-side clients will be able to see their CSA balance with other brokers, in addition to Hobart,” wrote La Vecchia in an email. “We will not limit their view to just Hobart’s CSA balances,” adds La Vecchia who emphasized the platform’s neutrality as well as its ability to develop best practices and standardized features during the interview. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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