Emerging US Brokerage Firms - October 2005 -Myrna Rivera

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  • 1. Emerging Brokerage Firms in the United States Architects of Financial Prosperity Investment Management Consultants Presented to The Board of Trustees Los Angeles CityEmployees Retirement System October 6, 2005

2.

  • About the Study:
  • Objectives
    • Gain soundunderstandingof emerging brokerage landscape
    • Identify emerging brokerage firms
    • Support the LACERS Board in
      • determining constructive and informed policy decisions
      • Moving ahead to provide access and opportunity to firms in the marketplace
  • Basis for the Study
    • Commissions as Trust Assets
    • There is alpha at the point of trade
  • Backdrop
    • Fiduciary responsibility
    • The Concept of Best Execution
  • Content
    • In-depth review and analysis of the current landscape
    • Quality database
      • Detailed profiles of each firm
    • Review of other emerging brokerage programs

3.

  • The Concept of Best Execution
    • Brokerage commissions are an asset of the Fund
    • Trustees can direct managers to employ certain brokerage firms as long as trustees honor fiduciary responsibility and managers obtainbest execution.
    • Best execution:
      • SEC:a duty to seek the most favorable execution terms reasonably available given the specific circumstances.
      • AIMR: the trading process firms apply that seeks to maximize the value of a clients portfolio within the clients stated investment objectives and constraints.
    • Why put a name to the concept?
      • SEC: to ensure that brokers and managers trade in the clients best interest.
      • Trading costs are not limited to commissions on trades.
      • Effective trading = cost containmentplusvalue-added.

4.

  • Best Execution
  • Components
    • Explicit
      • Commissions: price change associated with executing a trade:
        • Cents per share - Mark up/Mark down
        • Basis points on total value
    • Implicit
      • Market Impact or Liquidity Charge: caused by a trade entering the marketplace
      • Timing: price change due to information leakage or momentum
      • Opportunity Cost: cost of incomplete orders
  • Examples of Methodologies for Measurement
    • Volume weighted Average Price (VWAP)
    • Implementation Shortfall
  • Who measures?
    • Plexus - Quantitative Service Group
    • ITG - Others

5.

  • Best Execution
  • Why measure?
    • Can affect performance
    • Can impair ability to generate alpha
    • Can be one of the largest erosions in investment value and a barrier to superior performance
  • A Pro-active Stance
    • Acknowledges and establishes best execution standards
    • Monitors transaction costs of both managers and brokerage firms.

6.

  • The Investment Managers Perspective
  • StatedMethods for Brokerage Selection
    • Traders and portfolio managers decide
    • Trading Oversight Committee
    • Tiers system
      • Tier I: Bulge bracket firms - Tier III: Client Mandated
      • Tier II: New firms, niche players
    • Separate category for sources of street research
  • Getting on the Approved List: Some Stated Criteria
    • Quality & quantity of proprietary research
    • Ability to execute different types of trades, like directed or programmed.
    • Legal & compliance profile 4.Financial Strength
    • Financial strength 5.Credit Risk
    • 6. Regulatory violations

7.

  • In Search of Emerging Brokerage Firms
  • Definition:
    • Emerging Brokerage Firmis typically used to refer to relatively new companies with a newly developing revenue model.
    • A firm is usually considered emerging based on its years of experience and its volume of business.
    • Such firms are usually established by seasoned professionals with an interest in developing certain working teams and strategies, and with a knack for or interest in executing specific trading strategies.
    • These firms seek to compete on equal terms with larger, traditional brokerage firms.
    • The term emerging is also used in reference to firms whose owners are women, ethnic minorities and/or the physically challenged.
  • Definition employees:
    • 51% ownership African American, Hispanic, Asian, Woman and/or Disabled Veterans
    • Members of the National Association of Securities Dealers

8.

  • Preparing the list:
    • Conversations with LACERS
    • Conversations with LACERS investment managers (10)
    • Firms known to Consultiva
    • National Association of Securities Professionals
    • New America Alliance
  • Reaching out
    • In-depth, comprehensiveRFIbased on
        • Brokerage criteria and trading qualifications provided by managers
        • Existing programs across the US
        • Covers:
          • 1. Organization and Firm Overview 6. General Trading Capabilities
          • 2. Legal & compliance Issues 7. Equity Brokerage
          • 3. Company Personnel 8. Fixed Income Brokerage
          • 4. Research Capabilities 9. Emerging Brokerage Experience
          • 5. Sales
    • 57 firms contacted, 31 responded.
    • Subsequent tele-conferences with each.
    • Profiles developed for each.

9.

  • The Universe
  • A Seasoned Group:
  • At least21 (72%)firms are more than10 years old .
  • All founders with over 15 years experience.
  • Most have over 20 years experience

26 136 2 Number of Employees 12 34 3 Years since Founding Average Maximum Minimum Observation 10.

  • The Universe

7 California4 Other 2 Washington DC 3 Texas 5 Illinois 8 New York Number Location 11. The Universe

  • 52% African American
  • 24% Hispanic
  • 10% Asian
  • 7% Disabled Veteran
  • 7% Woman-owned
  • Caucasian

12.

  • StatedTrading Capabilities
    • Most have average trading experience of over 15 years.
    • All have electronic trading capability.
    • Nearly 40% provide either equity or fixed income liquidity.
    • Nearly 30% have proprietary trading desks, either equity or fixed income.
    • 75% have Transition Management capability, either through an alliance, or through their correspondent.
    • 13 firms execute trades for soft-dollar credit.
    • Commission rates are $0.01-$0.06.

13.