What is the broker vote and why is it important?
The Institutional Equities Business can be split into two main categories - the sell side and the buy side. The sell side is comprised of the Broker/Dealer arm of Investment Banks (IB's). The buy side is populated by money managers such as mutual funds, hedge funds, pensions and endowments. They are the consumers of the sell side's main products: mainly research, sales and trading. Secondary products may be access to corporate management, electronic trading systems and conferences run by the IB's.
The vote is a ranking of all the IB's and the services they provide to the buy side. This ranking provides the initial baseline for the amount of trading commissions that will be executed with the IB. Logically, better customer service leads to higher rankings and more trades. A large mutual fund company such as Fidelity may deal with 70-80 Broker/Dealers.
Vote information may be provided on a quarterly, semi-annual or annual basis. This may be done in a formal or informal manner. It can be a 30 page presentation, a back of the envelope note or a call saying, "You are in the top 5." Every client has their own methodology with different weights for services. Mutual funds may place more emphasis on research. Hedge funds may place a higher value on best execution. No two firms are exactly alike.
The ranking can be done as an absolute number i.e. 1 - Goldman Sachs, 2 - Morgan Stanley, 3 - Credit Suisse,... This is rarely done. The buy side is cannier than that. They usually tell firms that they are in the top 3 or 5 for 10 firms. Or they divide their brokers in Tiers and say, "You are in Tier 1. We have 5 firms in each Tier." This allows them to have some discretion in allocating their trading commissions.
The buy side can subdivide their vote into sectors or geographic regions/countries. Generally, there is a US/Americas, Europe and Asia vote. The International Markets have a more complicated vote since there is often a need to subdivide into different geographic regions/countries. For example, there might be a separate Scandinavia or Latin America vote. Canada may be included in the US or International vote. The Equity Divisions of most IB's are organized in this manner.
The main contributors to the broker vote are the portfolio managers, analysts and Chief Investment Officers of the buy side firms. Again, each firm weights the votes differently. On the whole, the portfolio managers have the greatest say.
This is an introduction to the broker vote. I have simplified it to give a baseline understanding.
