Buy Side Turns To Mid-Tier Brokers

In an era of declining commissions, buy-side traders are utilizing mid-tier brokers, either in addition to or in lieu of bulge bracket firms, because they can offer value in the form of research in specialized niches.

“We seek out mid-tier brokers because of the very high quality of service and attention we get in regards to our specific research mandates,” said Mike Earlywine, head trader, North America, at Ecofin, an investment management firm

“We feel that we get good value for our commission dollars with the smaller firms. We get a very high quality of service for a commission run that might not make the radar at some of the larger firms.

“That being said we do a good portion of our total commission budget with the larger bulge bracket firms but it isn’t to the degree it once was—and that is more do to with the mid-tier firms raising their game and earning more of our business than anything the larger firms have or have not done.”

At mid-tier brokers, “we often get a seasoned professional who can provide value-added coverage and help organize the research in a timely and succinct manner”, said Earlywine, adding that he uses about 20-25 brokers.

“While most brokers are very good, our need to seek out analysts with specialized coverage often requires we trade with desks that are best described as sub-optimal and, as such, a big part of my job is to immunize Ecofin from the vagaries of the brokerage world,” he said.

Laurie Berke, an analyst for Tabb Group, a capital markets consultancy, added: “Out of the storms of change—in regulation, market structure and technology—has come a new breed of sell-side professional with a higher level of skill than his predecessor.

“This new hybrid sales person, the execution consultant, part trading partner and part trading guide, has developed the DNA to survive and thrive in the ‘new normal’ of trading in the capital markets,” said Berke in a recent blog posting. “And he’s moved on to the trading floors of foreign exchange and even the U.S. Treasury markets.”

Ecofin is a $1.2 billion investment management firm headquartered in London.

“Ecofin specializes in public and private investments into the worldwide utility, infrastructure, energy and alternative energy sectors,” said Earlywine of Ecofin. “Our funds include hedge funds, long-only funds, private equity and debt funds, and bespoke institutional mandates.

“Most recently, we launched in December the Vista Long/Short fund, a global equity hedge fund focused on efficiency and disruption within power, energy, transport, technology, industrials and other related industries.”