Why Go Agency?
According to Dushyant Shahrawat, research director for the investment management practice at TowerGroup, there are many reasons the buy side continues to turn to the agency broker for execution. "Not all asset managers are comfortable dealing with the UBSs, the Goldman Sachs or the Morgan Stanleys -- they want the time with the smaller guys," he explains. "They might also get a level of innovation at the smaller guys they aren't getting with the bulge-bracket."
Bryan Kievit, head trader at Accipiter Capital Management, a New York-based healthcare hedge fund, says he goes agency for two reasons: trust and ability. And he places his trust in Greenwich, Conn.-based Weeden & Co. for a good deal of his agency business.
"Trust is obviously not something specific to agency brokers, but in a lot of ways it's one of the main things they can offer day in and day out," Kievit says, adding that he would rather trade with someone with whom he has an ongoing dialogue. For a firm like his, Kievit continues, it's important to transact in stocks that aren't actively traded, and "it's nice to have the familiar voice on the other end of the phone that you know is looking out for your account."
As for ability, Kievit says, while it's difficult to define with commission contraction and market fragmentation, the required skill sets around equity execution definitely have changed. "Any agency broker we transact with must have access to all of the latest technology, including algorithms and access to crossing networks," he relates. "But more important is a sales-trading staff that understands our style such that our merchandise is shopped to other accounts in ways that minimize market impact."
Leo Hmelnitsky, global equity and FX trader at AXA Rosenberg Investment Management, also is a big proponent of the agency broker model. In fact, his firm relies solely on agency brokers for execution. "From what I've seen there is definitely a large shift to the agency-only relationship simply because the liquidity is available," Hmelnitsky says.
AXA Rosenberg Investment Management
"Our goal is best execution, and we don't need to pay for the research and we don't need the provision of capital," Hmelnitsky continues. "Our model allows us to step away from the name if it runs against us. We have flexibility and don't need to fight the tape, so agencies provide all the services that we need."
For Hmelnitsky, the agency broker provides both the high-touch, value-add and the lower-touch, lower-commission trades. He says he looks to the agency broker for two things -- access to sales traders for "additional color or to trade names that are large and will affect the portfolio," and access to DMA, algorithms and program trading.
"The relationship stays with the broker and is cultivated, and we make it worth their while to talk to us," Hmelnitsky reveals, adding that some of AXA Rosenberg's agency broker relationships stretch back 20 years. Still, the firm trades with more than 140 agency brokers.
"We tend to diversify our flow very diligently, and we trade with a lot of counterparties on a daily basis," Hmelnitsky explains. "We're looking for best execution across the board and training our agency brokers to fly under the radar."