Brokers Rush to Cost Analysis

Article excerpt

Byline: Sophie Brodie

Brokers are developing or buying sophisticated models that analyse transaction timing and costs in anticipation of the UK's Financial Services Authority's (FSA) decision on the unbundling of commissions later this year.Melissa De Vries, a consultant at Greenwich Associates, the US research firm, says: "More firms are doing trade cost benchmarking in the US and the UK. We are inundated with requests for commission rate analysis so companies can demonstrate best execution to clients."

Several brokers have signed up to a system designed by Inalytics, the UK division of Plexus, the US analysis company. They use the analysis to measure their internal costs and intend to publish the information to clients in the future.

One broker says: "We want to stay ahead of the curve, whatever the FSA decides on unbundling. There is a demand for greater transparency and we want to be in a position to show we can add value."

Sandro Lunghi, an analyst at Inalytics, says: "Our database analysed well over a trillion dollars-worth of trades in the second quarter in which markets showed a marked pick-up on the first quarter."

Inalytics claims it can reduce overall trading costs by as much as 78 basis points over three years through its real-time reporting of each step of the dealing process from a manager's decision to buy a stock to the execution of the trade.

Until now, fund managers have kept transaction cost analysis relatively low down their list of priorities despite the FSA's attempt to highlight the issue through its consultation paper on soft commission and unbundling.

However, Paul Yates, head of UBS Global Asset Management's UK business, believes that interest in transaction costs will continue to grow once firms comply with level two of the Investment Management Association (IMA) code on cost disclosure.

Publication of the code last year followed the Myners report on pension funds and commissions, and has introduced level one, which relates to procedures. Level two requires fund managers to include transaction schedules in reporting to pension fund clients. …