Investment manager, seeking broker-dealer firm, must be big on analytics, algorithmic trading and above all "commitment"

Capital commitment, that is.

Capital commitment or the willingness of the sell-side to use its own money to take on a buy-side position that it would then attempt to principally trade away over a longer time frame, has traditionally been viewed as a premium service typically reserved for a select list of clients.

Like many others, this definition is going through a fundamental change. As access to decision-making information barriers fall, thanks to everything electronic, so will agency margins. Or so the conventional wisdom goes! With every facet of sell-side services under assault, the one value-added-service that has shown some resilience, is the sell-side's ability (willingness) to "stimulate" liquidity.

Capital commitment in its modern sense (portfolio acquisition and re-distribution services) is one key area that distinguishes the capabilities of different sell-side desks. Examples abound of traditional sell-side powerhouses' move towards committing more of their own capital to principal (proprietary) trading. Most recently this article appearing in the August 2005 issue of the Bloomberg Markets magazine, is quite telling.

Hence my true measure and probably the best proxy for "Quality of Execution:" the sell-side firm that consistently shows willingness to take on "blind bid baskets" is the one most capable of achieving "best execution."

The rationale here being that capital commitment in the form of blind-bidding, means more risk and additional inventory that needs to be internally-absorbed (principal positioning) or re-distributed (algorithmic mastery) and only those broker-dealers with the best channels, savviest traders and sharpest execution algos, can and will constantly show willingness to take on more capital commitment initiatives.

It also goes to show that these are firms that have long realized that the "vanilla institutional agency" business has forever changed.