SANTA MONICA, Calif. - Execution costs can vary by as much as 100 basis points among major brokerage firms trading exchange-listed and NASDAQ stocks, a study shows.
The study, by Plexus Group, Santa Monica, also found Bear Stearns & Co. and Jefferies & Co. were the best brokerage firms among 20 major full-service firms examined.
The two firms executed trades for customers at the lowest overall transaction cost, which includes the market impact of a trade and brokerage commissions, the study reported.
The study found the brokerage firms with the broadest market penetration, or volume, weren't necessarily the best firms at producing the lowest transaction costs.
A partner at a money management firm that uses Plexus to analyze its own trades suggests the new study is flawed because of the difficulty in analyzing such data.
"I think the study is flawed," said Martha E. Ortiz, partner and head trader, Aronson + Fogler, Philadelphia.
But she added, "I give kudos (to Wayne Wagner, president of Plexus) for making such an effort" to study brokerage costs.
The study examined more than 300 brokers, including 20 major full-service firms, used by institutional investors; it was based on 330,000 trades done by more than 40 major investment managers providing their data to Plexus.
The study shows "there is such a thing as best execution," said Mr. Wagner. "The idea that there is no difference in brokers except in the commissions they charge isn't true."
The Plexus study analyzed execution for two different 12-month periods, one ended March 31 and one ended Dec. 31.
For the period ended March 31, for stocks listed on the New York and American stock exchanges, the study found the broker providing the best execution, that is, trading at the lowest overall costs for customers, was Bear Stearns, which scored 3.92 out of a possible 4. It was followed by Jefferies, which isn't even a member of the New York Stock Exchange, with a 3.75 score. Tying for third place were Lehman Brothers Inc., Smith Barney Inc., and First Boston Corp., all scoring 3.67.
For NASDAQ stocks over the same period, the study ranked Jefferies, scoring 3.92 out of 4, as the best, followed by Salomon Brothers Inc. with 3.83, Kidder Peabody & Co. with 3.75, Goldman Sachs & Co. with 3.58, and Bear Stearns with 3.42.
For the period ended Dec. 31, for exchange-listed stocks, the study again rated Bear Stearns at the top, this time with a perfect score. It was followed by Smith Barney with 3.92, Jefferies with 3.75, Lehman Brothers with 3.67, and Goldman Sachs with 3.5.
For NASDAQ stocks over the same period, the study again ranked Jefferies as best, this time with a score of 3.83. It was followed by Oppenheimer & Co. with 3.67, Kidder Peabody with 3.5, PaineWebber Inc. with 3.33, and C.J. Lawrence Inc. with 3.25.
The brokerage firms with the broadest market penetration for exchange-listed stocks - ranked from the top by Plexus for the period ended March 31 - were Merrill Lynch & Co., Morgan Stanley Co., Kidder Peabody, Salomon Brothers and PaineWebber.
For NASDAQ stocks, the firms with the broadest market penetration were Goldman Sachs, Merrill Lynch, Morgan Stanley, First Boston Co. and Bear Stearns.
The firms best at difficult trades in small-capitalization stocks, listed on exchanges, were Kidder Peabody, Smith Barney and Salomon Brothers.
For NASDAQ stocks, the firms best at difficult trades of small-cap stocks were Jefferies, Goldman Sachs and Lehman Brothers.
Mr. Wagner declined to publicize the complete rankings of all of the other major brokerage firms, or list all of the other brokerage firms analyzed in the study.
Among non-full-service brokerage firms, the study, for the period ended March 31, ranked as the best for overall lowest costs for exchange-listed stocks Robertson Stephens & Co. It was followed by Standard & Poor's Securities Inc., Gerard Klauer Mattison & Co. and Abel/Noser Corp.
For NASDAQ stocks, the study ranked the best non-full-service brokerage firm as Instinet Corp.'s regular real-time daily service. It was followed by the Arizona Stock Exchange, Instinet's Crossing Network and Janney Montgomery Inc.
The study ranked all of the full-service and non-full-service brokers on four main factors for each exchange: market capitalization of the stock, momentum (the way the market is moving at time of trade), liquidity (the average daily trading in the stock) and the order size of trade.
At Aronson + Fogler, Ms. Ortiz said she hasn't seen the Plexus study yet. But she is familiar in general with Plexus' work, having hired it to analyze the money management firm's own trading.
In terms of Plexus' work for Aronson + Fogler, she said her firm doesn't always agree with the analysis. "But I like to see what they are doing."
But on the new Plexus study, she said, "To rank brokers is a very difficult analysis to make.
"I don't think they found the bottom line out there yet to analyze the brokers" and rank them.
"The numbers are hard to analyze," she said, making it difficult to reach a conclusion that would rank brokers in a certain order.
She noted that of the major brokers, her firm uses Jefferies.
At Jefferies, Frank Baxter, chairman and chief executive officer, said in regard to the Plexus study, "The best trade is when a willing buyer meets a willing seller.
"Our job is to maximize these meetings."
