Unbundling debate: The price of progress
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Unbundling debate: The price of progress

The unbundling of execution and research costs will dramatically accelerate the global consolidation of equity broking firms. But it also raises questions about the quality and efficiency of the buy side.

Unbundling debate: Participants

JT, ClientKnowledge Unbundling’s aim is transparency of pricing. Nirvana in that context would be a world in which you undertake your execution on a pure best execution basis. You pay for capital commitment as an explicit element, for standard research supply, for Bloomberg screens, for consulting, ideas generation, model building, all as separate explicit fees. That would be a logical conclusion for full unbundling. How close are we to that?

MS, SLI We’re close. What you describe makes complete sense, and I think we’ll get there. But I don’t think it will deliver much more added value than the commission sharing agreement (CSA) process. From the Financial Service Authority’s point of view, unbundling needs to deliver transparent information to the client, and protection for the client. The key enabler of that is the complete freedom of the trading desk to place every order where they wish on a best execution basis. If anything achieves that, then it’s met the number one deliverable from unbundling. The CSA process does that. So would complete disaggregation, but, it’s just adding another one or two percent to something which is 97% delivered.


JT, ClientKnowledge Mention unbundling to most people and the debate centres on the fundamental value of research services. But perhaps the most profound change is that making the cost of research explicit will reduce the amount of money the buy side will be prepared to pay for it, which in turn means that the sell side need to focus on flow to recoup lost revenues. Are we seeing this?

TT, Morley Almost every investment bank I’ve spoken to about unbundling seems to think it’s about execution rather than research. This may reflect the internal politics of investment banks these days – trading is everything. But it seems that flow is very valuable to them, even though flow is the ultimate commoditization. It’s nothing more than capturing some big pool of money. Is trading the be-all and end-all for the investment banks these days and is that view what drives their approach to unbundling?

JQ, Citigroup Not in our case. By the end of this year we will cover 800 stocks in Europe, that’s up around 25% over the past few years. We’re making a big investment in our research product, and in the areas where we're getting some traction with the clients. This may be in emerging markets such as Russia, in specific special areas such as accounting or in strategy. These are areas where we’re making significant investments. Clearly we recognize there is a value to flow and we want to participate, but flow isn’t everything. We still consider our clients to be clients, not counterparties.

CJ, Henderson Well, when we say to brokers, ‘We’re going to pay you with a CSA cheque’, they tend to say, ‘No, no, we want execution. We’ll take the flow.’ Clearly £1 worth of commission on execution is worth more to them than £1 written on a cheque and given to them. There’s a big land war going on amongst the top ten, or 15 brokers. They want that flow, and they know if they don’t get it, they’re gone.

JS, Schroders A number of broking firms claim they’re losing a fortune executing our business, wanting more reward for it. But equity trading must be profitable, because everybody’s trying to do it. We think the flow is hugely valuable.

CJ, Henderson There is certainly a group that has aggressively saying they want 20, 30% of our execution business.

EM, Lehman As people become unwilling to pay an explicit payment for research, then the currency of payment will increasingly shift towards volume. So volume has value, and that value will vary from bank to bank. As volumes continue to rise, and as explicit payment for research goes down over time, obviously one should make sure that they’re in a dominant trading position. It doesn’t mean that they de-emphasise their research operation, but if you ask them how they would like to get paid – cheque or trade, they’ll say the trade.

CJ, Henderson Flow is more points of contact, so more opportunities to do business.

EM, Lehman I’d just like to add for clarity that we don’t believe the value research generates for our clients is declining. We think the value of intellectual capital in general is becoming increasingly important as our fund-manager and trading-desk clients deal with larger assets or run more complex market structures. However, the explicit payment for that research, the explicit commission rate or aggregate amount of money that’s paid for that research, will decline and that is what changes the currency of payment I mentioned.

MS, SLI This takes us back to the question of where liquidity and execution might go. One radical possibility is a logical extension of the importance of flow and unbundling, and relates to the number of houses used to execute. In the past we have used a large number of counterparties as reward for all the services that they give us. Now we have the freedom, we don’t have to. They’ve been unbundled, they’re separate payment streams, so we take this intermediary step of appointing a number of key counterparties to handle our execution and use them to pay a much wider list for research. A logical extension of that, based on the value of flow, would be to appoint one organization to handle all your execution, to get the maximum benefit of flow and you could still reward everybody from the CSA process for research. You could also negotiate the cost, and I don’t mean the commission, I mean the impact, the entire cost of execution, with that counterparty in advance. We’re better off, you’re better off, you’ve got the flow, you pay everybody else for research.

TT, Morley And they all tender for the business.

EM, Lehman We’ve had discussions with clients who have felt that it’s in keeping with the concept of best execution to agree a contractual amount of volume to award to a particular counterparty. They could pay a fixed rate per month as an idea, they could pay a basis points or a per ticket charge.

TT, Morley On this basis, if the market ends up with, let’s say, 10 significant trading firms who have each 10%, once you’ve done your execution of valuation analysis, trade cost analysis, and they’re within half a basis point on the average, if you can’t distinguish between them, wouldn’t you run a tendering procedure? You bid for my business and tell me what basis you’re going to do it on, and what you want us to pay, or whether or not you want to pay us for it, because flow’s got value. Why not?

JS, Schroders But in practice there may be four or five, not 10. You’d risk getting into bed with the wrong organization and suddenly the capital you wanted isn’t there, and the people you did the deal with have left. There’s a lot of risk in going to an exclusive relationship with somebody else. In theory the model is absolutely right, but I think the industry is going to stop far short of that.

Research on the ropes?

JT, ClientKnowledge Now let’s turn to the contentious subject of research. It seems that unbundling exposes a whole host of questions and contradictions in what clients and banks believe research is, what it’s for and how much it’s worth.

RP, Investit Absolutely. When we talked to the larger fund managers about how they use research and whether they think they’re getting good value, the answer was: “No”. But when we asked, “Why is that?” they weren’t sure. Now that is an issue for them internally. But at least now through unbundling fund managers can choose what to buy, rather than simply having to deal with the stuff that arrives. That’s one of the main changes. Fund managers will need and can have a procurement process where they decide in advance.

EM, Lehman The problem is that it’s very difficult to say in advance what you need to purchase and how much you should pay for it, when you don’t know what value can be derived from it. You have to have some experience of having received it to know whether it’s worth something to you or not. Then you have to assess how much value it’s added to your performance, either directly or indirectly, over some longer time period. There’s no price because it’s not commoditized in the same way that typical consumer goods or services are commoditized.

JS, Schroders Brokers are discovering that they’re offering a whole range of different services within research. One might be access to that research. One might be a guide who’ll direct you to what’s worth reading. Or you might want an idea, and good ideas are capacity-constrained, like every other piece of active management. We think the piles of broker research are pretty much free, but the ideas are worth something. There is so much published research out there that, ex-ante, it could be valued in much the same way as racing tips published in a newspaper: it is only when you look ex-post, that you can say “this person has been providing me with a really good service”.

RP, Investit Could you not say: “I’ve had a marvellous run with these people, I want to be one of the 30 people they talk to and I am prepared to book that in advance”, rather than be one of 120 people they’ve talked to and pay them something for it afterwards.

TT, Morley The problem is that no one’s got much information, because no one’s measured how sustainable those good ideas are. One may be very valuable, but unfortunately the next several may be dud. A better model would obviously be payment in arrears for results, as opposed to up front.

JQ, Citigroup Some of our buy-side clients are trying to use the information they’ve had over the past and transmit it in a forward-looking way, and others are paying in arrears and using the CSA model to say: “Looking back, this is what we genuinely value and this is what we think it’s worth paying.” But last year we dealt with about 1,100 clients in European equities, and to generate menu pricing option for all the different types of service for each individual client could be done, but the administrative burden would be significant.

EM, Lehman The internal example we use is that if we had one analyst with great ideas, where would they allocate their time? They would target and focus their time on the client that would be willing to pay the most money for that service, and that’s the bottom line. That’s how any prudent business person would allocate their resources.

RP, Investit And how can they make the most money out of each idea?

EM, Lehman Well, you’re getting to the implementation methods. There are a number of different ways to do it. We, for example, worked out with Fidelity an arrangement to establish a fixed sum of money per annum, which would be revised based upon the actual experience of value having been received during that time period. That’s one way. The other way is to simply provide the counterparty with this person’s services for no explicit sum of money in return for directing their volumes toward our organization, still on a best execution basis. And that is precisely what goes on in our fixed-income division today.

CJ, Henderson How does that model further unbundle?

EM, Lehman Well there is a belief in the market that explicit charging for those types of services is a futile effort and does not generate any value for our organization or for our clients. The services that our analysts or sales people provide, whether it’s quantitative analytics or fundamental research, strategy or economics, are part of the overall package of service that we provide our clients, and that inclines them to, but does not require them to, trade with us. So they’re inclined to trade with Lehman Brothers because of this greater value they derive, but we still have the obligation of best execution. So the value we derive is this inclination on behalf of our clients to want to trade with us, or the branding it gives us with those organizations and the understanding of their business model that it gives us.

JT, ClientKnowledge Mel, do you think you’re truly unbundled?

MS, SLI I do, in terms of the CSA. I used to think that pure unbundling is the buy side picking up the research tab, and that the CSA route was not therefore pure unbundling. But having lived through a CSA process, I now believe it is unbundling. Is this sell-side push or buy-side pull? The FSA’s UK definition of unbundling is the separation of and the accounting for the buy-side execution and research processes. Now, we’re all agreed about separating the execution and research processes, and we’re all agreed about accounting for these in order to give the portent of these numbers to the end client, so there’s nothing contentious about that. The contentious bit for me is specifying by the buy side to the sell side. I’d like to test this by putting John and Emad on the spot. Imagine there were two clients that both offered your firm £1 billion worth of business. On this, Client A will pay you 20 basis points commission, which on an unbundled basis is 5 basis points execution and 15 basis points research. And Client B will pay 14 basis points on the trade, 7 basis points for execution and 7 basis points for research. When you discuss internally the service you will give these two clients, are you going to decide that Client A will receive a £500,000 execution service and a £1.5 million research service, and Client B will get a £700,000 execution service and a £700,000 research service? Or are you going to give Client A £2 million worth of service and Client B £1.4 million worth of service?

JQ, Citigroup We tend to look at the gross revenue that we receive relative to the services, across both research and execution, which we provide. If we’re being paid a higher sum by one client for the same consideration of total service inputs, then clearly this is a more attractive outcome for us.

EM, Lehman We would look at it two ways. Firstly, we would look at the revenues in each of those products, how much our execution product generated, and how much our research service generated. The second way involves a level of bundling at a higher level, where we look at how much you’re paying us across all the products or services we’re providing. We’d then determine whether or not we want to continue providing that research service if, let’s say, it was not cost-efficient by itself, but only when put into this broader package or perspective of your worth to our organization.

MS, SLI We wouldn’t have any problem with this not being in the spirit of unbundling, because the buy side still has the numbers it requires for unbundling. It’s only the buy side that requires numbers. The sell side has not been mandated to unbundle. They can re-bundle the numbers and assess what kind of service the client’s going to get.

JQ, Citigroup Frankly, we're still having to re-bundle to an extent, because in some situations it costs us more to execute business for a client than the price that has been agreed upon in either a CSA or for declaration purposes to an end client.

JT, ClientKnowledge A number of you said it’s not obvious what to charge for research until you know the value of an idea, and it’s hard to know that before the event. But anyone in an advisory capacity sells services ahead of the outcome being known. The buyer buys people and track record.

RP, Investit We will occasionally ask fund managers if £1,000 an hour seems a reasonable price to pay for their time with that analyst. And if his or her ideas boost performance and attribution systems can work out that that £1,000 an hour becomes £2,000 in the portfolio, then there would be an auction for that analyst’s services.

TT, Morley Although the logical outcome surely ought to be that if the highest bidder ends up getting the value added research, why wouldn’t it go inside the provider? Isn’t that the highest return of all?

SB, Euromoney You can take that to its logical conclusion. How do you get paid for the best idea? The idea generator borrows money, executes the idea and keeps the revenues.

JS, Schroders You can cut a performance fee. You outsource your alpha, and give the idea generator, the broker, 20% of the upside. That’s one way.

SB, Euromoney If the star analyst’s producing consistently good ideas, Lehman should never be selling those ideas in the first place. Isn’t the dark truth here that you can’t value research because it’s not worth anything, ie, it can’t be demonstrated in proved performance?

CJ, Henderson That’s the argument between whether you are driven by alpha or by beta. With the alpha model we’ll go for research, we’ll consume it and fund managers will outperform for a while, but they won’t outperform forever. However, if you use the beta model, you don’t take research.

EM, Lehman We do use our research ideas internally, so we do think research has value. How could you be selling a product or service that you wouldn’t use yourself? The reason we don’t use it first is because we think that the value that we generate to the overall organization by providing that service to our clients, the branding it generates, the overall relationship value that it creates, is greater than any P&L we could make on any specific trade idea. The customer service model provides better value to our overall organization in the long term. I also think people assume clients take research ideas verbatim. That rarely happens, and this is no disrespect to any research department. It’s just that the idea of having a conviction call from a research analyst at a highly ranked organization is value generating to the fund manager, because they like to have ideas, and then they can form their own opinion about those ideas and their own ideas, and that’s the value. So it’s more of a consultancy service as opposed to flogging ideas that have a specific price tag.

JS, Schroders There are things that you want to buy, or have access to. If you suddenly get interested in Russian mining stocks, you may not have in-house research to cover that, but a broker has, so you get instant access when you need it. You might just need some quite easy background information, some spread sheets that you hadn’t time to model yourself. They’ve done it and they’ll send it to you for free. It’s all part of the relationship. But other times you’re paying for fantastic ideas. Research is a very short word, covering a multitude of different services.

EM, Lehman And just to add one other thing, our fixed-income division research department, both in the US and here in the UK for Europe, has ranked number one in the various polls for the last few years. We continue to invest in it because of the branding value that it creates for the organization. So research is branding, marketing. We think it brings our organization and our clients closer together, we understand their portfolios, and it’s linked to the overall commercial relations that we have with them, although it doesn’t translate into: “We’re paying you this or that.”

JT, ClientKnowledge Unbundling leads to greater transparency. Greater transparency in almost any financial market leads to greater efficiency, which tends to lead to radically increased volumes. It attracts new players into the market, sees the departure of some players and the radical growth of others. Services that weren’t valued before get pitched out. In fixed income, as explicit payment for global market services have gone down, the headcount in research in successful firms has grown. There are many fewer people doing generic economic or currency research, but there are many more people doing different types of customized, more quantitative research. On that basis, which kinds of research products can we expect from the sell side, and have you buy-side institutions worked out what you value?

EM, Lehman As the buy side reallocates what it spends its money on all the commoditized stuff will go and that’ll be good for the industry. But there will be more thematic research with a focus on specific actionable trade ideas and sectors or stocks, and more quantitative research perhaps.

TT, Morley We’ve worked internally on what we really value from research. It does vary from geographical region to region, but one thing we clearly value is one-on-one access to real experts. This seems to be a resource-constrained factor, and we want to ensure we get access to this in the way that we need. That doesn’t mean just any analyst. It means the ones that we have decided are really good potential partners, advisers in interpreting situations. The second clearly valuable, if slightly contentious, thing is the area of company access, which is also resource-constrained. In some cases we think we’re the valuable people, but there are other situations where the dynamics are different in the relationship.

JS, Schroders If you ask most active managers, one-on-one access to a good analyst and company access is what they really value in terms of research input. But are you going to reward that with flow in an unbundling world? Or are you going to expect to pay for it? How are you going to ensure you get that access? Because that’s what fund managers want.

EM, Lehman It could be that in a fair bidding contest we won the prime brokerage mandate for one of your funds. We all came in at the same price, three brokers tied with the same price, but there was an inclination on your part to want to award the mandate to Lehman because of the broader relationship. There is that.

JQ, Citigroup Clearly if there is an opportunity for a broader relationship outside the standard cash business, then that is a factor in the equation. But if what you value about our service is clearly indicated to us through the broker review process, then we will align our resources appropriately. What’s been interesting in the whole CSA process is that we had expected a much greater degree of clarity from the broker review process than we’ve seen to date and that makes the provision of service more opaque than it needs to be.

Practical results

SB, Euromoney Coming back to a point that John made about the actual results, what have been the practicalities of doing CSAs and what were the difficulties? What have you achieved? Has it worked as you expected?

CJ, Henderson My personal view is that most of the industry has not yet fully unbundled. Our number of individual brokerage firms with which we deal has gone from 204 down to 160 on execution, which I think is still far too many.

JQ, Citigroup Was that 204 globally or in Europe?

CJ, Henderson That’s globally.

JQ, Citigroup Well, some institutions were dealing with around 200 brokers in Europe alone.

CJ, Henderson Henderson was historically a large softing house, and I think CSAs are a good way to transition some of that. We found implementing CSAs internally very straightforward. The discussions with the sell side were occasionally challenging, sometimes robust, but generally we got to the conclusion that we felt was reasonable and fair. The legal side was tricky, and we spent a lot of time with lawyers. But we are very pleased with how it’s worked. We’ve hit our predicted numbers for the mid-year point. We haven’t paid out any money from our CSAs yet, as it’s still a pay-in-arrears model.

SB, Euromoney Have you had any feedback from the sell side? Are they happy with how the agreements have worked?

CJ, Henderson Feedback has been positive. There have been some small issues along the way but all have been resolved.

EM, Lehman I think the brokers are happy with the CSA model because it does force this consolidation. You’re only going to sign so many CSAs, it doesn’t prevent you from trading with people outside the CSAs, but it would naturally concentrate your volume towards those CSA providers.

JS, Schroders In a list of 170 brokers worldwide, quite a lot of them would never even have heard of CSAs and with most you wouldn’t be expecting to do the volume that would make it worthwhile putting a CSA in place. We originally signed 12 firms up for CSAs, but soon found that there were a number of other firms that were still getting substantial execution volume because that was where we had found the liquidity; and they had accumulated research commission as a consequence which they would otherwise not have been awarded. In the light of that we have expanded our commission sharing list to include another half a dozen of such firms.

JT, ClientKnowledge Does this raise the possibility of a structural change in the market much more along the lines that you see, for example, in currencies, where the principal counterparty would be a house that doesn’t have liquidity in, say, an emerging markets currency, and would be expected to effectively buy that in from a local bank? So in the same way you go from 200 brokers down to 20 and the others that you need to cover the different markets and liquidity pools, are expected to service you through the 20?

JS, Schroders In theory that’s where it would go, but we were surprised that the number of brokers we’re still dealing with didn’t go down as dramatically as we had anticipated.

CJ, Henderson For Henderson, I don’t know what the right number is. I know it’s more than 10, but fewer than 200, and I suspect it’s a moving number. Maybe 80. You can talk in theory about a one-broker market or pooling your business, but I just can’t see that happening.

MS, SLI For one thing it leaves the problem of having to trade with a number of houses that can’t execute, because that’s still the only way of rewarding them. And that’s compromising best execution.

RP, Investit Can anyone guess whether they’ve bought less redundant research in this period than previously?

JS, Schroders It’s too early to say that anything has changed. We’ve unbundled, but neither we, nor our counterparties have reacted to the numbers yet. But we will. There’s a good chance that CSAs are just a staging post, to a time when brokerage commission is not used to pay for research at all.

EM, Lehman Some would argue the CSA route was a cumbersome way of implementing transparency and separation of execution from research, and even brokerage consolidation. There are a number of our counterparties who say they can do all that without a CSA. Their approach is: ‘Look, when we trade execution only, we’re going to trade on an execution only commission rate. When we trade on a full service basis, we’re paying for research, then we will trade at a higher rate, and they will gravitate their trading volumes toward counterparties that do the best job trading. They think that that mechanism works. Setting up the CSAs is quite complex, especially for our global clients. There are jurisdictional issues, administrative issues, compliance, tax issues, and it isn’t over yet, because the jury’s still out on the tax issue.

JS, Schroders But behaviours haven’t changed yet. As we go through the first broker reviewing process looking at the results you’re going to see the behaviours change, and that will be the real measure of the process and of CSAs.

MS, SLI We are at the end of the beginning really and there are going to be material reviews of the experience, externally and internally. There will be hard numbers that haven’t really been delivered internally before, and some of those are pretty eye-opening. There will definitely be a fall in consumption of and spend on research.

JQ, Citigroup In our experience, the lazy consumption situation is improving. We have been clearly told in some of our formal broker reviews: “We do not value these services. If you choose to continue to give us those services, that is an investment you can choose to make in the future opportunities you see in us as a client, but that’s up to you.” But when we’ve reported that back internally and made some adjustment to the service provision, we find that individual portfolio managers can get upset and tell us: “Don’t worry about that, just carry on as normal.” So we are at an early stage. The process will change as we understand better how to use the resources, and the buy side tells us more clearly which services they value over which they are happy to forgo.

Market structure changes

CJ, Henderson If we just pay an execution rate, what impact will that have upon market structure, specifically spreads?

JS, Schroders Well we’ve always held a view that the focus has been on commission and it’s a very small part of your overall transactional costs. Spreads won’t have to change hugely, but they’ll certainly be able to accommodate the decline in explicit commission, and it’ll get more like the bond market.

EM, Lehman As explicit commissions for research come down, there’ll also be commission rate compression on the execution side, at the commoditized end – the agency orders, electronic trading. So then where will the brokers earn their money? We think our clients need more capital commitment and provision of liquidity, given that their asset sizes keep growing, their position sizes keep growing and that they need more liquidity from the market than the exchanges can provide or match. So our role as intermediaries providing that liquidity is increasing in importance and our ability to make money in that segment of the business will be where we derive the value. It has also to be put into the context of the relationship, but there is inherent value in volume. It just depends on what the brokers can do with that volume.

MS, SLI Another structural change unbundling will bring about is that the large buy-side institutions have been subsidizing the small buy-side institutions in the world of research, and unbundling will start to change that. A sell-side firm has three clients; the small client is paying £100,000 commission for full service, the medium-sized one is paying £1 million commission for superior service and the large client is paying £10 million commission for very superior service. But was the superior service 10 times the service that the small client was getting? Was the very superior one 100 times the service the small client was getting? Of course not. I think those days are numbered.

TT, Morley It comes back to the one person gets analyst access and the other one doesn’t, and the raw material is almost valueless the moment it’s been distributed in any electronic form, because then everyone’s got it.

Knock-on effects

JT, ClientKnowledge Emad mentioned earlier that there’s increased pressure to make capital commitment. John, do you share that perspective? And do you feel that is a result of unbundling?

JQ, Citigroup Yes, we are seeing a rise in requests for access to our capital, but I don’t think it is specifically a reaction to unbundling. How we approach it is evolving. We’re becoming smarter about how we apply our capital and about who we see as our partners. The proportion of our overall turnover where we commit capital is going up, but we monitor this aspect of our business very closely Part of that’s the contentious issue about retention and loss ratios and a better understanding between ourselves and our clients about the cost to us to provide this service And how we calculate it.

JS, Schroders I think that the banks employ capital to get flow, and they should price accordingly. The idea that we should be using commission to pay for capital has always been complete nonsense.

TT, Morley It doesn’t apply in the fixed-interest arena, does it?

CJ, Henderson From a buy-side point of view, I expect our counterparts to commercially price all risk trades. I do not like the term ‘loss ratio’. It appears that the sell side has unilaterally decided that three times VWAP is the measure against which risk trades are benchmarked. Why?

JQ, Citigroup I think we’re beginning to understand that, but it doesn’t alter the fact that we are changing the way we behave and better understanding the implications of what we do.

EM, Lehman I agree with John that the liquidity provision trend has been independent of unbundling. However, unbundling affects not just execution research, but agency execution and risk execution. The whole notion of loss ratio implies a bundling process. We give out capital as a loss leader, in the hope that we get agency trades at commission rates which are artificially high because of losses taken on the trading side. We’re arguing for unbundling there as well. There should be a separation of agency trading from risk trading. Then agency rates will fall to appropriate levels, perhaps close to electronic rates. Then risk trading should be more appropriately and rationally priced. You may still get aggressive spreads, but the thought process will be more rational about why banks are putting up that capital.

JT, ClientKnowledge The corporate credit market exhibits a number of the characteristics that we’ve talked about. Some of the sell-side research providers, in an effort to reduce costs and to develop synergies, have merged their equity and credit divisions. Are we moving towards a credit-trading model?

EM, Lehman I think it’ll be a hybrid model. You might have all of your agency volumes being electronically or programmatically executed, and anything of substantial size above what the exchange can match for you will be done through your intermediaries, your brokers, in the form of capital commitment as in the credit market.

JT, ClientKnowledge As we look to wrap up, where you see your organization heading, and what do you think the timeframe is for getting towards the end point?

CJ, Henderson At Henderson the CSA was the first step. There was initially resistance by some fund managers but that dropped dramatically after we showed them the numbers. They will soon be putting absolute amounts of money into research and the dealers will become completely unencumbered. Time line? I’d like it to be six days, but I suspect it might be 18 months. In parallel you’ll have the industry moving, but I’m not sure how. At one point I did think we’d go to the fixed-income model. I don’t think we will now.

RP, Investit I expect that we’ll move through the waitress approach to buying research. Now, we’ll sit down and see how good the service is and decide whether we leave a tip or not. Moving to a dollar amount for research booked in advance will take quite a long time while the fund managers understand what they value, and there’ll be a rearguard action from the smaller firms. But I think we’ll get there.

JS, Schroders The changes to the execution side are happening very quickly, and the unbundling process will accelerate them. Our traders are now completely unfettered by our need to pay for research. On the research side, now we’ve quantified research commission, market mechanisms will start to determine the overall value and it is perfectly possible to see it shrinking quite sharply if not disappearing altogether in favour of hard payments. We expect that to play out over the next 18 months to two years.

JQ, Citigroup We will evolve as the environment changes. From a research perspective, we see ourselves as a waterfront coverage house, and that may require some subtle internal management as the Darwinian approach to analyst compensation takes effect. The most important analysts will inevitably be paid more and the more maintenance analysts will get paid less. We’ve engaged with our clients on this issue so far, and we will continue to do so.

TT, Morley The way we purchase research is becoming much more sophisticated. I’m sure there will be lower expenditure on unwanted research, and lower basis point expenditure in terms of commission rates, if they’re still paid. There’ll be more proprietary research, more independent research and less of this general research. There will be a consolidated sell side in terms of execution capability, and they will probably focus less on the block traditional institutions and more on the sexy institutions. Their researchers will probably migrate closer to their trading desks and less towards traditional research departments.

EM, Lehman Could I just agree with all of that? As I said at the beginning, the transparency that the unbundling process brings leads to more rational decisions on how we collectively allocate our resources. There’s pressure for explicit pricing for research and for agency execution, and that will lead to consolidation of counterparties. It won’t be as dramatic on the research side and it’ll take longer. But I think it will lead to a hybrid trading market structure, with increasing emphasis on capital provision, very much like in the credit markets.

MS, SLI Execution first. Echoing what we’ve just heard, there’s certainly consolidation in the number of counterparties used for execution and that will continue. That will be good for the implicit cost of execution, so that is a benefit. On the research side, although I don’t think it will add much value moving to the full Fidelity-style unbundling, I do think that that is where we will end up. And under those circumstances the buy side is likely to further reduce spending on research. I therefore see the end client winning on the execution side through getting superior execution. I think best execution is, “professional dealers with access to all major execution venues operating in an unbundled and compliant environment”. And if unbundling does no more than deliver best execution to us, then it will have been a success.

JT, ClientKnowledge Thanks you all very much, we have to leave it there.

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