Exclusive Online Only ContentState Street Extends Commission Management Services Through Acquisition
March 13, 2008
State Street Global Markets announced that it has expanded its commission management services through the acquisition of software provider Financial Sockets. The investment research and trading arm of State Street Corp. said the deal allows it to offer clients an end-to-end solution to better manage commission flows, address regulatory reporting and administer commission-sharing arrangements (CSAs).
The new offering will include broker evaluation software that enables investment managers to tie compensation to the quality and depth of a broker’s services. It will also administer CSAs among asset managers, brokers and research providers. Such capabilities help fund managers decide which brokers they want to reward with their trade execution business, their actual versus budgeted commission spending, and their soft-dollar and directed commission expenditures.
“Partnering with State Street Global Markets presents an opportunity to integrate our technology with their industry-leading commission management services,” said Robin Howard, executive director of Financial Sockets in London, in a statement. “Together we will expand our services to a greater number of the world’s leading asset management firms at a time when demand for more transparency is growing.” Terms of the deal, announced March 11, were not disclosed.
Industry observers suggest that the Financial Sockets transaction does not necessarily reflect a move toward industry consolidation, but rather the vendor’s need for funding to expand its product and client reach. Competitors of Financial Sockets, which counts as clients 12 fund managers and 65 brokerages, include Cogent Consulting, Rontech and BNY ConvergEx Group’s Eze Castle Software unit.
Nicholas Bonn, EVP of State Street in charge of equities trading and transition management, said that the bank had been adapting proprietary commission recapture software to monitor CSAs. “The acquisition of Financial Sockets allows us to offer our buy-side clients dedicated broker-evaluation software and commission-sharing software,” he said, adding that State Street will concentrate on the U.K. market first.
Howard, who will stay on at State Street Global Markets as senior equity product manager, said that since early last year Financial Sockets has been seeking a new parent to expand its Recap software, which is used by U.K. and U.S. fund managers. Financial Sockets also offers BrokerSelect, a broker evaluation and commission allocation tool, and BrokerPort, which allows brokerages to maintain meeting notes with fund managers to facilitate the broker evaluation process.
Both client commission arrangements (CCAs)--soft-dollar programs--and commission sharing arrangements allow brokers to set aside a pool of commissions that money managers can allocate to selected research providers. The key difference for U.S. money managers is that they rely on introducing-broker agreements to facilitate CSAs--many boutique research firms have registered as broker-dealers so they can be paid through shared commissions. In the U.K. non-brokers are allowed to share commissions.
Commission recapture “unbundles” commissions from total execution costs, returning a percentage to the pension or investment fund to lower trading commissions. U.S. funds that fall under the Employee Retirement Income Security Act must follow recordkeeping guidelines set by the U.S. Department of Labor for their recapture programs.
Regulatory requirements on both sides of the Atlantic have been a boon for the commission management software sector. The U.K. in 2005 mandated that fund managers unbundle the costs of trading from research and other services. The Securities and Exchange Commission has not gone as far, but in 2006 clarified what services constitute research under the so-called safe-harbor provision--a 1975 amendment to the Securities Exchange Act--and made it easier for fund managers to enter into CCAs and CSAs.
