White Paper : The Changing Face of Research Procurement

Commission Sharing Agreements

Asset managers today face a much more dynamic environment whereby they can pay for high quality research for their clients without being obliged to simultaneously combine it with trade execution. This ‘unbundling’ of commissions has been made mandatory in some G20 regulatory regimes while in some places the standards are still loose. This paper maps out:

• The extent to which the exercise of separating and redistributing execution and non-execution commission components has grown in various jurisdictions.
• How commission sharing arrangements (CSA) growth is driven by both alpha generation on top of just regulatory compliance.
• The implications of ‘unbundling’ on the structure of institutional equity markets.
Decomposing Commissions
Most equity commissions are divided into two components — the ‘execution’ portion to pay for the stock transaction itself and the ‘non-execution’ portion to compensate the executing broker for non-execution services which primarily covers research.

In most developed markets there’s enough oversight over execution commissions as pension funds and mutual funds — clients of asset management firms — demand ‘best execution.’ This also builds into 3rd party trade cost analysis (TCA). By contrast, the much larger ‘nonexecution’ commission market has been historically subject to little scrutiny. But that’s now changing.

When commissions are bundled the execution and nonexecution portions of the commission are inseparable and are captured by the executing broker. When unbundled, the commission not related to trade execution is put in a commission sharing account (CSA) account held by the broker on the asset manager’s behalf. The asset manager can retroactively pay a wide variety of 3rd party research  providers from this account. An important fallout from this has been the end of the oligopoly of investment banks over the $25 billion per annum (Source: Greenwich Associates Study) asset manager research expenditure.

Frost Greenwich CSA F.pdf



Frost Consulting

Q4 2012