Money Managers Boomerang Commission Savings on Bloomberg's Tradebook
Bloomberg Tradebook is helping managers of US subadvised accounts recapture brokerage commissions using a new algorithm which relies on technology from UAT Inc., a Denver-based software specializing in the subadvised industry.
UAT's platform called iPerx is the engine driving an algorithm Bloomberg calls Boomerang which allows traders to set user-defined rules to route low touch orders to Bloomberg's Tradebook for execution. Orders designated as high touch can remain on the fund manager's blotter. The algorithms parameters are based on expected market impact.
"By using Boomerang to automatically direct low-touch trades directly to Bloomberg's Tradebook, traders can spend more time delivering value for those trades that are more crucial to a fund's performance," says Tom Warren, UAT's founder and chief executive. He estimates that fund performance can be improved by four to six basis points on an annual basis through the use of more efficient commission recapture. Subadvised accounts are mutual funds managed by external advisers, not related to the fund. At least 13 percent of US mutual fund assets are subadvised, by industry estimates.
Under the Investment Company Act of 1940 asset owners -- including buyside firms which have funds handled by external unaffiliated asset managers as well as trusts-- have the legal right to recapture a portion of the commissions from trading for the fund and delivering the portion back to end investors. The practice typically involves receiving a rebate of the commissions paid to broker-dealers. In the case of Bloomberg's Boomerang the savings really come up-front from separating "low-touch orders" from "high-touch orders" and moving low touch orders into low cost agency brokerages. Low-touch orders can account for a majority of orders.
The deal with Bloomberg gives the two-year old UAT access to Bloomberg's large distribution channel it needed to boost interest in iPerx. UAT created the intellectual property surrounding iPerx, which has won seven U.S. patents. Warren won't comment on any aspects of UAT's agreement with Bloomberg, but market players familiar with such transactions say that the deal is likely a multi-year exclusive contract so UAT is replacing previous agency brokers with Bloomberg now executing all of the low-touch order flow and paying UAT. For Bloomberg, the affiliation with UAT provides a means to enter the commission recapture space without building its own technology or buying a firm outright. Warren says that UAT will continue to work on other technology initiatives separately.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)