Commission Sharing Agreements in Asia: The Right Idea at the Right Time?

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7 September 2011


The Asia-Pacific cash equity market has grown quickly and reached higher levels of maturity through algorithmic trading, direct market access, smart order routing, and alternative trading systems (ATS). Japan in particular has started to show signs of fragmentation. This has led to an environment that is conducive environment to best execution, which commission sharing agreements (CSAs) can help to achieve.

In a new report, Commission Sharing Agreements in Asia: The Right Idea at the Right Time?, Celent studies the potential for use of CSAs in the leading Asian markets. The Asian market has grown rapidly in the last few years, and this has created an environment that could be receptive to the use of CSAs. As a result, CSAs are expected to grow in popularity because they allow the investment manager to achieve best execution in a fast-evolving scenario. The emergence of broker-dealers that only provide execution service in a number of the Asian markets has also allowed the industry to work towards unbundling of trading and execution, since this ensures that execution-only brokers and research-only firms are both dealt with fairly.

The development of the US equities market has been a precursor to the evolution of other markets. Similarly, with regard to CSAs, the US and the UK markets have been the pioneers. By comparison, a lot of the new developments are expected in the Asian equities markets. APAC jurisdictions are just beginning to introduce best execution rules or guidelines that require portfolio managers to ensure they are getting the best deal for their trading and research.

“Most of the regulators in the leading Asian markets have not come out with a clear policy with regard to commission sharing agreements,” says Anshuman Jaswal, Celent Senior Analyst and author of the report. “However, the Asian markets stand to benefit from the use of CSAs because they are expected to increase transparency and reduce the conflict of interest that exists when an asset manager pays commission to a broker that is engaged in both execution and research.”

This report looks at the different types of CSAs and the role of the market environment in the overview. The report details the US and European experiences with regard to CSAs, followed by an examination of the Asia-Pacific market. Regulation will be an important issue because each jurisdiction might treat CSAs differently. The rising number of CSAs that have to be maintained with different firms means that there is a need for aggregation, which is discussed in the report’s final section.