Buy-side firms are looking for a more holistic view of their commission wallets so they can factor the data into their broker vote results and in their usage of research-related services.
In early July, Markit completed the integration of its Commission Manager and Broker Vote software modules so that asset managers can relate their commission allocations to their broker rankings. Phase Two will be completed in September. In Phase three, Markit plans to integrate its Calendar module, which is a conduit for the sell-side delivering value-added research-related services to the buy side, such as investor conferences, events, analyst one-on-ones, and non-deal roadshows. Asset Managers will be able to leverage this data to inform their broker rankings.
For the past decade, asset managers have used their client commission arrangements (CCAs) in the United States and commission sharing agreements (CCAs) in the UK and Europe to allocate commissions to trading and research providers.
"Today, commission management is really a CSA aggregation tool that enables managers with a single-sign on to sell all of their CSA and CCA activity with all of their brokers in one application," explained Tom Conigliaro, managing director and head of the Trading Services Group at Markit.
"However this CSA/CCA activity is only a slice of the client's business," said Conigliaro. Buy-side firms also do business with brokers outside of the CCA/CSA circle, and that piece is not captured within our tool today," said Conigliaro. "What if our customers could see the summation of the commissions they've paid to their broker universe?" he asked. Clients could then log into Commission Manager and see a holistic view of the business they've with all of their counterparties.
The integration will enable asset managers to use the results in Markit's Broker Vote product to inform how best a particular manager should pay all of their brokers, said Conigliaro "As a result, the vote results will have even more relevance in a Commission Manager that is considering the entire commission pool and not just the narrow CSA/CCA slice of commissions," said Conigliaro.
Broker vote can drive payments
The Broker Vote tool is one where asset managers and hedge funds have the ability to configure their vote based on three levels of hierarchy. Markit works with each asset manager to configure their vote and determine which questions they want to ask of their brokers. Their brokers can be ranked based on the ranking criteria they choose -- for example, it could be points or a dollar-based vote. So, a broker could be ranked one to 10 based on dollar value of commission payments or based on points.
"It's a tool to help them rationalize whom they should be paying versus who they are actually paying," said Conigliaro. The tool can identify differences between a broker's ranking and the dollar value of commissions actually paid tot that particular broker. For example, a firm's voting results could show that Broker A is the clear leader, but that Broker A has received a small slice of the commissions. An extreme case would be if a broker ranked very low but was being paid the highest amount of commissions. On the basis of the vote results, an investment management firm could raise appropriate questions. "If one research provider is ranked highly via the Vote, does that same provider rank as highly in terms of actual commissions paid? If not, why not?," asked Conigliaro.
Once the ballot is completed, the system generates a scorecard in PDF format, which is configurable by the manager. A buy-side client has the option of sending the vote results to their sell-side counterparties or they can hold the scorecards back. An investment manager would score a broker based on criteria including execution quality, effectiveness of the research, the people who provide sales coverage, the amount of time and effort and number of analyst meetings.
For more information on Markit's integration project, read "Markit Hires Veteran to Develop New Trader Dashboard for Buy Side."
"In the future, an investment manager will be able to tabulate broker votes, have all of your brokers ranked and then have a budget created for which balances are owed. And they'll load up the information into a budgeting tool that will show, for example, what is owed to broker x, broker y and broker z, respectively. Asset management firms can then run their reports to ascertain their commission targets, print them out, or load it into Excel. "The information would be at their disposal and they could use it to amend the Commission Manager targets," explained Coniglario.
Markit expects to integrate the Calendar module by year-end, enabling asset managers to view research events and leverage the data as an input to their broker-vote process.
Due to regulatory tailwinds, the Broker Vote product is gaining momentum because investment managers need to have a process and an audit trail for how they are allocating research and trading commissions, said Conigliaro.
According to Greenwich Associates, institutional brokerage commissions increased 10% for the 12 months ending February 14, 2014. In fact, 80% of the commission wallet increase came from spending on research and other related services, stated the June 4 release announcing the study results.
Currently more than 130 asset managers are using Markit's Commission Manager while the number of brokers is up to 35, an increase of more than 100% year-over-year.
"The growth in our Commission Manager product has been pretty rapid, at least double the number of clients year-over-year," he said.
On the broker vote side, some buy side firms are staying with their own internal system or use a competitive system, but many have said an integrated system was appealing. "By creating this integrated system Markit's product becomes more attractive," said Conigliaro. "We will continue to enhance the integration through the remainder of the year," notes Conigliaro.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