What do funds get for $.05/sh commish?

Discussion in 'Trading' started by AAAintheBeltway, Dec 22, 2003.

  1. In this whole mutual fund corruption mess, the use of "soft dollars" has not really been an issue. The ICI did issue a resolution to ban soft dollars, which was immediately attacked by the geniuses on Kudlow& Cramer as somehow unfair to research shops, who apparently depend on this source of funds.

    My understanding is that mutual funds and other institutions typically pay 5 cents a share for executions, or roughly 10 times what most of us pay. Some of this extra goes to soft dollar payment for things like research or trading systems. From an economist's standpoint, any time you have this sort of apparent extra expense that is used to subsidize something else, you have to wonder what is going on. My understanding is the arrangement is attractive for funds because they stick the fund shareholders with the excessive commissions, then use the soft dollars to pay for something that the management company would otherwise have to eat. Is this correct? If so, isn't that an enormous abuse and rip-off?

    I ran this by a friend who manages a fund and he made fun of me and said what they are paying the big commish for is the broker's ability to move size without distorting the price too much. My understanding was that brokers had backed off from doing this, but maybe I'm wrong. Certainly my impression is the fund guys know next to nothing about trading and execution and regard it as somehow beneath them.

    Is this just another rip-off or do the funds get value for paying 10 times the commish we pay?
  2. I cant answer your question, I am a small size trader and I trade for $0.005/s though. Good executions most of the time too

  3. AAA,

    Funds paying .05-.06 cents per share is nothing new over the last 5 years. A Goldman Sachs or Morgan Stanley would say that the client is paying for RESEARCH as well, and not for any special sort of execution capability.

    If a fund really wanted to focus on execution expenses, they would hire a young guy for $40,000 per year and make him an execution clerk, thus using a B/D for clearing purposes only.

    Most mutual funds and even hedge-funds, because they are so fundamental in nature and research driven will not pay a trader very much money to operate a trading desk for the fund. They simply want a "monkey" to do the execution., nothing more, nothing less. Aside from that, they have no problem calling a broker and having him handle the execution for .05 cents per share.
  4. AAA, I work an agency desk for a small boutique BD and the value we add to our DVP clients is anonymity and flexibility. Case and point, i`ll get an order from a fund to buy 100k ABC..no bid (oops a little slip there :D ) big deal right? Uh-oh ABC trades 30k share a day. when a fund is paying .05 and up sometimes! they want to see us working that order for days until complete..meanwhile using some discretion as to price and timing. In other words....a real human 99% of the time will get a better price than a VWAP program...the VWAP program cannot see a seller step in with size and smack the stock down .50 on 5k shares because it is so thin. But I can see that and bid for more stock than the "normal " unit I may use on another order. It also may be cheaper in the long run to pay up for executions than have an in house "order clerk" that gets paid a salary.
    all of that said...I am sure there are some soft dollar shenanigans going on at some funds...but not for long with all the new regs coming down the pipe
  5. the margins in that business are coming way down - not too many people willing to pay .05 to .06 -- I think .03 is more the norm now -- which is still alot !!!!!
  6. Accounts who use the desk pay up. Who is going to work those pain in the ass orders for >.03? certainly not GS or BSC....and anyways, the reason funds are still paying upwards of .05 is for softdollars. Pay the bills in the office at the end of the month and such.
  7. Thanks for the insight. That's pretty much what the fund guy told me, and he is small cap. But surely if you are talking something that trades even a few 100k shares/day, it doesn't take a huge amount of skill to do reasonable size without moving it too much.

  8. I am not so sure about that. I am not sure about the performance of such black box VWAP systems, but as a former trader who has a lot of experience trading VWAPS, they are extremely time and attention consuming, and circumstances outside of your control (large delayed prints going up .50 away from the market) can ruin your day..

    Yes, you can make a killing trading them on occassion, many times you are lucky to break even after ticket charges..

    I have traded them perfectly many days, only to have a huge print outside the market take me out of the $$$ and ruin the order. NOTHING is worse than this. They are a crapshoot, and the worse part is they take away your attention from other things that are more productve..
  9. No problem. Not much skill, just a little experience and knowing when to represent a larger peice of the order.
  10. you are right..very time consuming. That why the funds pay up for using a desk. When I first started I would get screwed by a big print. Thats the biggest disadvantage to trading upstairs. There are ways of getting involved in those prints...you have to be on the bid/offer at all times with a portion of the order. In my experience the spec will know you are a DOT buyer/seller all day (in the case of NYSE of course) and let you be the hammer if no one else is around.
    #10     Dec 22, 2003