He declined to name the firm, but traders said Goldman Sachs & Co., New York, has led the charge in separating proprietary trading from client trading. In a related move, Goldman earlier this year instituted a rule for its proprietary trading desk requiring traders on the desk to wait 30 minutes to trade a stock that had been subject of a research call to clients by Goldman equity analysts.
Goldman spokesman Michael DuVally declined to comment.
"I think that's where most of the Street is going," Mr. Riad said.
Richard Kos, an independent consultant to pension funds on issues including trading, said the problem of proprietary trading desks looms large in the shifting power balance on Wall Street.
"The crux of the issue is: Can the person you're talking to on the sell side be trusted?" Mr. Kos said. "This question isn't new and doesn't go away unless you take (brokers) out entirely."
Eliminating brokers from the equation — known as disintermediation — is taking place to some degree as firms like Pipeline Trading Systems LLC and Liquidnet Holdings Inc, both in New York. Other trading firms such as ITG Inc., New York, are developing ways to connect institutional asset managers directly.
Money management executives agree that brokers' proprietary trading and inappropriate use of trade information are always concerns.
"We've always been control freaks on our trades," said George U. "Gus" Sauter, chief investment officer at Vanguard Group Inc., Valley Forge, Pa.
"We always have control, as opposed to granting discretion to brokers. We do want to make sure we're not providing too much information, but we want to provide information where it's necessary."
Many times, Vanguard only needs a broker to connect the firm to an electronic trading venue, in which case "we really don't want information about our trading to be disseminated," Mr. Sauter said. But when Vanguard needs a broker to commit its own capital to get a trade done, "we need to give up information."
"You never want to stop being paranoid, but at the same time, we've got strong enough relationships with our brokers that we think they're going to treat our orders with propriety."
Ted Oberhaus, director of equity trading at Lord, Abbett & Co LLC, Jersey City, N.J., said control of information flow is one area sell-side brokers need to work on in the new power structure.
"Brokers will have to be forced to be flexible and be able to provide information flow," he said. He listed information on market rumors as well as trading activity at the various market centers as examples of the information broker-dealers can access and provide to their money manager clients.
He said brokers can do that because they participate in just about every sector of the market and trade at every venue.
But he added that access to information is a double-edged sword. He said brokers need to find a balance between providing information or trading ideas based on one client's order flow without wiping out the anonymity of that order.
At Rydex Investments, Rockville, Md., Stephen Sachs, director of trading, said he has the proprietary-agency trading conversation not only with his current brokers but also with prospective brokers. The issue is invariably among the top two discussed at gatherings of traders from money management shops.
"As with a lot of things in this business, there's probably more talk about it than activity going on," he said. "Rumors of prop desks using buy-side trade information to profit are probably somewhat overblown."
But he added: "We understand there's striking a balance when using a broker … letting enough information out to find the other side (of a trade) vs. keeping as much information as close to the vest as possible."
Echoing Vanguard's Mr. Sauter, Mr. Sachs said "there's great value in having trading partners and trading relationships on Wall Street."
"We don't think there's great value in having 50 relationships, but there's value in having 10 really good relationships, and I think the sell side is really starting to get their arms around that concept."
Joseph C. Gawronski, chief operating officer of Rosenblatt Securities Inc., New York, agreed. He recalled his firm resolved problems a client had using the New York Stock Exchange's electronic order routing system, even though Rosenblatt wasn't handling the order. "Maybe we saved them a couple hundred dollars or a few thousand," Mr. Gawronski said. "It's not a lot of money, but it's peace of mind that someone is looking out for their interests."
Similarly, helping clients understand major market changes such as the Big Board's plan to create a hybrid trading structure and the SEC's new Regulation NMS are ways brokerage firms cement relationships.