A Quantitative Way to Rate the Sell Side - Part 2

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.