BATTERED BY A bear market and rapid technological change, the broking industry is struggling to reinvent itself. The advent of online broking and large-scale program trading has hit the traditional brokerage agency hard, while the Spitzer Global settlement is forcing banks to cease subsidising research from investment-banking revenue. Quite how standalone broking is supposed to make money is far from clear.
Market regulators will find it difficult to remove the incentive to cross-subsidise research simply because investment-banking fees are so large. Reforms seem to have only scratched the surface - a model still needs to be found where research pays for itself.
This may become a step closer if the British regulator gets its way.
In what is already being labelled Big Bang II, the Financial Services Authority (FSA) is proposing a radical overhaul to 'unbundle' brokerage services to fund managers so that trading and research is paid for separately - costs other than trading, such as research, would have to be split and permission from clients sought. Soft dollar commissions - the practice where brokers provide services for their commission, such as free Bloomberg or Reuters, terminals would also be outlawed.
The catalyst for these proposals was a review of institutional investment in 2001 led by Paul Myners, the former chief executive of fund manager Gartmore. He complained that costs incurred by fund managers were routinely passed on to their clients, saying the practice reduced the economic incentive to cut expenses.
Under the new regime, fund holders should benefit from lower dealing costs and the incentive for fund managers to reduce spending on research.