Bundled research/execution represents a conflict of interest between fund managers and investors. Using brokerage incurred on trade execution to pay brokers for ideas is often not acting in the best interests of investors, particularly when a substantially better price could be obtained by trading the same parcel with another broker or on an alternative trading venue. There is no reason for a fund to pay 20% more for the same volume of research, simply because the market is up 20% yoy. Good to see UK regulator pushing radical reform on this front. Time for ASIC to follow suit. Transparency and accountability needed in terms of the way Australian fund managers allocate the brokerage they incur on behalf of underlying investors. (VIEW LINK) (VIEW LINK)
Unlike offshore, the Australian institutional market remains largely 'bundled'. Bundling is where brokers provide other services, such as advice, research, data and analytical tools, in conjunction with trade execution. This often results in fund managers spending exorbitant amounts of investors money on broker research but also not necessarily satisfying their best execution obligations when buying or selling shares... 1/3
The 'old-school' way of simply giving an order to a broker who has provided research or with whom you have a good relationship can be an expensive exercise if that broker doesn't have the access or the tools to find liquidity across multi-markets. And there is a large, measurable difference in execution outcomes between the top few brokers that have invested in trading technology and those that have not... 3/4
Large fund managers, as well as those looking for extra performance versus their peers are increasingly transacting on the venue and in the manner which delivers best execution and paying separately for broker research. Smaller managers have taken longer to adjust to the new market structure in Australia, with many failing to appreciate the impact that the structural change of recent years is having on their investment performance. Without the regulatory pressure or demand for accountability from investors and asset consultants, it may still take a while for entrenched mindsets to change... 4/4
Historically, it mattered little which broker a fund manager used for executing trades. But these days, the same stocks can be bought on ASX, Chi-X or 20 dark pools, over 25% of the market is HFT and the majority of the market is algorithmic trading. Fund managers now have access to technology that enables them to find the other side of their trades without disclosing their intentions to a broker and to the rest of the market to their detriment... 2/4
I had no idea the pricing for the two were linked, I would have assumed that the research was a fixed price for a period of time. How do fund managers feel about this and has it been a sticking point or do they see it as part and parcel of the system?