Protecting commissions
Another challenge for Japan as it moves towards a CSA environment, will be the protection of the commissions generated but not yet paid out. This was an issue that took centre-stage in October 2008, since when, and rightly so, fund managers have become more demanding about what is happening to their commission dollars post trading. One issue that remains strangely blurred is whether monies awaiting payment in a commission pot remain an asset of the fund manager. Thankfully, it seems common sense has prevailed, and there is general agreement that such monies are not an asset of the research / service providers (at least until payment has been made), and certainly not an asset of the brokers that hold the commission pots.
The best way forward
The modern trading environment now provides fast, direct access to market gateways at generally attractive rates, such that execution risk has now been passed back to the buy side dealer. The next step for Japan is clear, but will not be easy. Establishing a best execution ideology, within the CSA concept of trading in one location and purchasing services from another, is novel and will take time to become established, especially within the domestic community.
Exciting times lie ahead for Japan and, supported by the cornerstone of the FIX Protocol, large roles await those companies, such as IND-X, that provide a complete CSA offering. Best execution relies on ease to market, and standardised, electronic order routing simplifies this process without compromising on flexibility. It offers transparency, reduces errors and, with some of the vendor products that are now available, can interact with systems from portfolio creation, order placement and execution through to downstream processing and transaction cost analysis. Japan might not be the first market to unbundle, but it has the chance to be the best.
Backing the tortoise – Is Japan’s slowly, slowly approach the best route to the best best execution?
