Cogent Signs Deal to Sell Majority Stake to Brokerage Consortium
May 21, 2009
Cogent Consulting has signed a non-binding agreement to sell a majority stake of the firm to a consortium of global institutional broker-dealers that will commit to use its platform to administer their commission sharing agreements with fund managers.
Further details on the deal were not disclosed, but Robin Hodgkins, founder of the Summit, N.J., based commission software management firm, said that there were at “least seven” brokerages involved. Hodgkins, who will continue in the role of chief executive officer and president of the company, said that each of the brokerages will own an identical minority stake in Cogent. The transaction will close before July 4.
Hodgkins, who will retain a minority stake in Cogent, first disclosed the endorsement of his firm’s CCA platform by a consortium of brokers in February. At the time, an industry source close to Cogent said that Barclays Capital; Credit Suisse; Goldman Sachs; Merrill Lynch & Co. and UBS were involved in the consortium.
The impetus behind the creation of such an aggregated system is to protect fund managers’ commission balances in the event of a sell-side counterparty going bankrupt. During Lehman Brothers’ bankruptcy hearings last September, a U.S. bankruptcy court ruled that the CCA balances belonged to Lehman’s fund manager clients, but it still took weeks for fund managers to get access to their monies.
Industry sources say that the consortium of global brokers had considered consolidating client commission dollars at a neutral technology vendor such as Cogent, a large agency brokerage, or enhancing one of the consortium member’s platforms.
Cogent’s Trak BD system, launched in January 2008, is now used by 70 broker dealers to manage commission sharing agreements (CSAs) with investment advisers and hedge funds, track brokers’ payments to research firms based on client approval of invoices and available research credits. Fund managers rely on CSAs, also known as client commission arrangements (CCAs), to use commissions paid to one brokerage firm for research and other services provided by another.
Trak BD sets commission rules, including minimum ticket charges, order sizes and other metrics for each fund manager. The system tracks brokers’ payments to research firms based on client approval of invoices and available research credits – and sets commission rules, including minimum ticket charges, order sizes and other metrics for each fund manager.
Trak BD uses a cloud computing, software-as-a-service, approach. The cloud offers a standardized Web-based portal for fund managers to view and manage commission balances with multiple brokers on a single platform. Such an approach allows fund managers to save on the costs of administering their CSAs with multiple-broker-dealers while broker-dealers would expand their client base, said Hodgkins.
“CSA Trak BD was initially marketed as multiclient single-broker system which meant that a broker could administer CSAs with multiple fund managers,” said Hodgkins. “However, the cloud approach incorporates a multiclient, multi-brokerage model in that fund managers can also manage their CSAs with multiple brokers.
While fund managers will experience cost-savings from administering their CSAs on an aggregated system and will reduce counterparty risk by distributing their commission balances with multiple CSA brokers, Cogent will not take possession of the CSA credit balances. Instead, the balances will remain with each brokerage firm.
In addition, not all members of the brokerage consortium backing the Cogent platform will be shutting down their systems to use Cogent’s new platform. “Some brokerages in the consortium said they will reduce their IT infrastructure costs, including database maintainence because they will use our system in its entirety,” said Hodgkins. “Other firms said they will run their IT infrastructure parallel to our system.”
