To Bundle or Not to Bundle? A Review of Soft Commissions and Research Unbundling

Abstract

Brokerage houses historically have provided research and related services togeth-er with order execution without separate fees. This practice of research bundling through so-called soft commissions has triggered an intense and ongoing debate considering that research bundling leads to nontransparent pricing and, therefore, can induce agency conflicts. A new European regulation has banned the use of soft commissions by requiring fee separation for execution and research services. Against this backdrop, we provide a systematic review of the literature on soft commissions to build a profound basis for further regulatory discussions and to uncover future research opportunities.

Keywords: Soft commissions, Soft dollars, Research bundling, Research unbundling, Trading costs, Brokerage industry