December 13, 2007

Traders today have so much on their plates -- from fragmented markets to complex technology and algorithms. Now, for some, throw on top of that the requirement to trade through minority- and woman-owned broker-dealers. Public pension funds at both the state and local levels, as well as outside investment firms that service them, increasingly are being encouraged -- or required -- to trade certain percentages of their flow with minority- and woman-owned broker-dealers.

Directing business to minority- and woman-owned broker-dealers -- or emerging broker-dealers, as they sometimes are referred to by state and local programs -- is nothing new for municipalities. It dates back to the late 1970s when Atlanta Mayor Maynard Jackson encouraged the city to do more municipal bond business through these firms. But today the trend is reaching even further into state and local pension funds and asset managers.

California, New York, Illinois, Ohio and Texas are a few of the big states leading the push to direct trading flow to minority- and woman-owned broker-dealers. Sometimes this is achieved through legislated mandates; other times, it's simply "encouraged" behavior.

The State Universities Retirement System of Illinois (SURS), for example, requires that, subject to best execution, domestic equity investment managers direct 25 percent of total commission dollars to minority- and woman-owned broker-dealers. And the New York State and Local Retirement System reported that in fiscal year 2006, minority- and woman-owned brokerages received about 31 percent of its total paid commissions.

Historically, these practices were put in place to better mirror the constituents of the plans or pension funds for whom the money is being managed. Today, these minority- and woman-owned broker-dealers are executing growing volumes and competition is heating up among minority- and woman-owned broker-dealers for a bigger share of the trading pie. These firms are skilled, they have niches that distinguish them from their peers, and they are just as focused and expert on technology and execution as their bulge-bracket counterparts.

Associated sidebar: The City of New York Turns to Minority- and Woman-Owned Broker-Dealers