Does Transparency Overcome Conflicts of Interest? Evidence from Investment Managers and Their Brokers
46 Pages Posted: 21 Mar 2009 Last revised: 14 Mar 2012
Date Written: March 1, 2012
The relationship between investment managers and brokers has been identified by regulators in Europe and the US as a potential source of conflicts of interest, with investment managers buying a bundle of services – including trade execution and sell-side research – from brokers at the expense of the investors. Little systematic evidence is available, however, on this complex relationship. This paper reports the outcome of a landmark ruling under the UK Freedom of Information Act, whichallowed us to obtain, from UK public pension funds, information on commissions, trading activity, payments for research and other variables. Following an important regulatory change in the UK that increased transparency, we find that average commission rates have fallen, and the proportion spent on research – rather than execution – has increased slightly. However, trading has increased significantly: the average churn rate increased from 27% to 73% from 2005-08, resulting in total commission payments to brokers nearly doubling.
Keywords: Brokerage, investment managers, pension funds, commissions
JEL Classification: G23, G24, G28
Suggested Citation: Suggested Citation