Non-U.S. Brokers Eye U.S. Buy Side

Terry Flanagan

Broker-dealers in Turkey, India and other nations around the world would love to sell research and trading services to large U.S. buy-side institutions. This is especially true in the current climate of tepid global volumes, which has trade handlers expanding their business-development ambitions.

That supply is finding demand from U.S. investment shops that are looking for more granular insights on their overseas holdings.

“We’re seeing more need from the buy side to have someone in the local market on the ground to gather information,” said Paul Karrlsson-Willis, president of Marco Polo Securities. “In the past they’ve relied on the global houses for overall international research. But with recent situations like Greece and the Ukraine, you want to speak with an analyst who’s living there every single day.”

Under U.S. Securities and Exchange Commission rules, foreign brokers are restricted from interfacing with the U.S. buy side unless there is a U.S. broker-dealer ‘chaperone’ that acts as the  de facto gatekeeper. Marco Polo is one of fewer than 10 U.S. broker-dealers registered with the Financial Industry Regulatory Authority to provide this service, according to Karrlsson-Willis.     

“Rule 15-a-6 rule enables foreign broker-dealers to come into the U.S. and speak with the buy side,” Karrlsson-Willis told Markets Media. “It’s a great rule, but it’s a rule that’s not understood very well because if you’re a sell side in the foreign marketplace, you’re allowed to come into the U.S. and speak to other sell-side broker-dealers in the U.S. Where it changes is when you want to speak to the fund managers.”

As per Rule 15-a-6, “a U.S. broker-dealer basically takes ownership of the relationship between the local broker and the U.S. buy side,” Karrlsson-Willis explained. “We have responsibility to Finra and the SEC to make sure that these local brokers are abiding by the rules and regulations of the U.S.

The chaperone broker-dealer assumes trade-reporting requirements, has its name on all trade confirmations, and must be in the loop on meetings with buy-side clients in the U.S. “We need to know who they’re meeting with and we have to do KYC (Know Your Customer) on those buy sides,” Karrlsson-Willis explained. “We do all of that work for the foreign broker-dealer, so they then don’t have to be registered here in the U.S.”

For a non-U.S. broker, outsourcing the connecting to the U.S. market can be a matter of efficiency. “We’re a growing shop, and time is money. We’d prefer to spend our resources on catering to clients’ needs rather than responding to the long list of requirements for approval with each U.S. firm,” Egemen Erden, executive vice president of institutional sales and trading at Turkey-based Finans [Invest] Yatırım Menkul Değerler A.Ş., said in a release.

“A key thing is that there are very few execution-only dollars out there,” Karrlsson-Willis said. “It’s very tough for a foreign broker-dealer to try and win business solely on the back of execution. And, global trade volume is shrinking, so you need to be able to get outside of your country and into new markets where there’s more opportunity. Most of the largest buy sides in the world are in the U.S., so, if you’re broker-dealer in a foreign country trying to expand revenue, the best place to target is the U.S.”


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