In the last article, we summarized the basic points of the McLagan Survey. There are some frequently asked questions surrounding it that I can answer.
Since each sell side firm sends in their commission data, how can they be sure that it is an apples to apples comparison?
McLagan holds the commission rates for each relationship between sell and buy side firms and the absolute commission dollars are normalized i.e. client a pays $0.01/share to broker 1 and $0.02/share to broker 2. Broker 1's numbers would be doubled for a like comparison. International trading commissions are calculated on a basis point rate multiplied by the market capitalization of the trade. These are gross commissions. When a sell side firm does not have a presence in a country's exchange, they pay a local broker fee. These are included in the commission figure. The same logic applies to soft dollar trades. To sum up, the buy side firm will designate certain transactions as soft dollar. The sell side firm will retain part of the commissions and use the remainder for buy side's research expenses i.e. Bloomberg terminals.
How is the survey organized?
The survey is split geographically into 3 regions: Americas, Europe and Asia. Americas has the most complete coverage and is dominated by the US with some Canadian firms. Europe is next with the UK having the largest universe in that area. Europe is split into UK/Ireland, Western Europe and Emerging Europe. Asia is the most diverse with the major centers being Japan, Hong Kong and Australia. Individual country reports are compiled too.
What are the products covered?
Within each region, the products are split geographically and by type. There are ratings are for Listed (NYSE) and OTC (NASDAQ), Canadian, UK/Ireland, Western Europe, Japan, Non-Japan Asia and Australian securities. The products are divided into Ordinary/Common Shares traded on the native exchange, American/Global Depository Receipts (ADRs/GDRs), Convertibles, Listed Options and Program Trading. The smallest data set is the options.
As part of their service, McLagan Partners visits the sell side firms and presents the findings to management. They will compile special reports that aggregate accounts and calculate the market share. This can be done for a branch office, a saleperson or salestrader's account package. As was mentioned in a previous post, this is one of the performance measurement statistics used in evaluating the sales force. For some packages, this has to be taken with a grain of salt. In the southwest, there are 3 large accounts and 2 of them have opted out of the survey.
Monday, June 21, 2010
Sunday, June 20, 2010
A Quantitative Way to Rate the Sell Side - Part 1
As a companion to Greenwich Associates' qualitative survey, investment banks also participate in a quantitative survey created by McLagan Partners (www.mclagan.com) from Stamford. Connecticut. Unlike the Greenwich Associates survey, trading commission numbers are self-reported by the broker/dealer community. The assumption for this survey is that each firm will report honestly. It is in their self-interest to have accurate information even if the news is unpleasant.
The McLagan reports are published every quarter and sell side firms value the regular and somewhat immediate feedback. Greenwich and Institutional Investor ratings occur once a year. Because of the quantitative nature of McLagan, they are able to cast a wider universe of buy side firms. Instead of sending questionnaires to thousands of buy side firms, they are sent numbers by the sell side - a more limited set. One thing in common between Greenwich and McLagan is that their results are to be kept private. They are performance measurement services that allow broker/dealers to improve their client service.
The process begins at the end of each quarter. A list of current buy side firms are sent to the sell side. This list includes any changes such as re-organizations, mergers or spin-offs since the prior quarter. McLagan asks if there are any new firms that should be added to increase their coverage universe.
The firm respects the privacy wishes of buy side firms by allowing them to opt out of the survey. This request is usually in response to the following comment by the broker/dealer. "Last quarter, we were ranked 3rd in your broker survey and we know that there were 5 firms with more commissions than us. How can we get this discrepancy resolved in the next quarter?" To avoid this conversation, the buy side will ask McLagan to suppress their records in the survey. If too many firms are suppressed, the survey is devalued.
Each sell side firm submits their quarterly commission numbers about 3-4 weeks after the end of the quarter. McLagan compiles the numbers and publishes the results 1 month later. The reports are run broken down by region (Americas, Europe and Asia) and by product. Products are split into country and type of security. Each sell side firm is ranked in absolute numbers and given a rank out of the total number of broker/dealers that trade with the buy side firm. Depending on where the firm is ranked, commission numbers are given at different benchmarks such as number 15, 10, 5 and average of the top 3.
These are the basics of the survey. I will give more details in the next post.
The McLagan reports are published every quarter and sell side firms value the regular and somewhat immediate feedback. Greenwich and Institutional Investor ratings occur once a year. Because of the quantitative nature of McLagan, they are able to cast a wider universe of buy side firms. Instead of sending questionnaires to thousands of buy side firms, they are sent numbers by the sell side - a more limited set. One thing in common between Greenwich and McLagan is that their results are to be kept private. They are performance measurement services that allow broker/dealers to improve their client service.
The process begins at the end of each quarter. A list of current buy side firms are sent to the sell side. This list includes any changes such as re-organizations, mergers or spin-offs since the prior quarter. McLagan asks if there are any new firms that should be added to increase their coverage universe.
The firm respects the privacy wishes of buy side firms by allowing them to opt out of the survey. This request is usually in response to the following comment by the broker/dealer. "Last quarter, we were ranked 3rd in your broker survey and we know that there were 5 firms with more commissions than us. How can we get this discrepancy resolved in the next quarter?" To avoid this conversation, the buy side will ask McLagan to suppress their records in the survey. If too many firms are suppressed, the survey is devalued.
Each sell side firm submits their quarterly commission numbers about 3-4 weeks after the end of the quarter. McLagan compiles the numbers and publishes the results 1 month later. The reports are run broken down by region (Americas, Europe and Asia) and by product. Products are split into country and type of security. Each sell side firm is ranked in absolute numbers and given a rank out of the total number of broker/dealers that trade with the buy side firm. Depending on where the firm is ranked, commission numbers are given at different benchmarks such as number 15, 10, 5 and average of the top 3.
These are the basics of the survey. I will give more details in the next post.
Tuesday, June 15, 2010
A Qualitative Survey of Sell Side Brokers
Greenwich Associates is a third party research company that advises sell side firms on how they are currently serving their clients and how they can improve. A review of the www.greenwich.com website lists a wider mission statement that includes both sell and buy side firms. In this article, we will concentrate on the sell side survey.
The survey starts when Greenwich sends out a list of the buy side firms that will contribute. The usual suspects are on the list: Fidelity, Capital Group, Wellington Management, etc. For these firms, the sell side nominates the contact who will receive the survey. Also, the sell side is encouraged to add new firms to the list. This helps Greenwich give the sell side more robust results and add new customers. The contact for any given buy side firm is by majority vote. So if 6 firms have John Smith as the contact and 5 firms have Pete Jones, then John Smith will be listed as the official contact. This is called "ballot stuffing". Obviously, if John Smith receives the survey, then the 5 firms that speak primarily with Pete Jones will be at a disadvantage.
I have not seen the questionaire but it is qualitative in nature. These answers are compiled into a rating score on a scale of 1 to 1000. A total result is given for the entire universe of accounts. Then ratings are given by each role within equities: research, research sales and salestrading. They can be further sliced and diced by account coverage. For any result to be statistically significant, a minimum of 5 firms have to fill out the survey. Greenwich also provides account profiles that contain feedback from the buy side firms. The contents are confidential to sales management. The salespeople and salestraders covering the account are not to be informed. However, I always wondered about it. If the buy side tells sales management of the investment banks on how to improve client service, how would management broach the subject to their staff without giving away the source? Especially after the Greenwich survey has been published.
The survey starts when Greenwich sends out a list of the buy side firms that will contribute. The usual suspects are on the list: Fidelity, Capital Group, Wellington Management, etc. For these firms, the sell side nominates the contact who will receive the survey. Also, the sell side is encouraged to add new firms to the list. This helps Greenwich give the sell side more robust results and add new customers. The contact for any given buy side firm is by majority vote. So if 6 firms have John Smith as the contact and 5 firms have Pete Jones, then John Smith will be listed as the official contact. This is called "ballot stuffing". Obviously, if John Smith receives the survey, then the 5 firms that speak primarily with Pete Jones will be at a disadvantage.
I have not seen the questionaire but it is qualitative in nature. These answers are compiled into a rating score on a scale of 1 to 1000. A total result is given for the entire universe of accounts. Then ratings are given by each role within equities: research, research sales and salestrading. They can be further sliced and diced by account coverage. For any result to be statistically significant, a minimum of 5 firms have to fill out the survey. Greenwich also provides account profiles that contain feedback from the buy side firms. The contents are confidential to sales management. The salespeople and salestraders covering the account are not to be informed. However, I always wondered about it. If the buy side tells sales management of the investment banks on how to improve client service, how would management broach the subject to their staff without giving away the source? Especially after the Greenwich survey has been published.
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