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The Real Reason(s) Why Steve Cohen Is Much, Much Richer Than You (In Steve Cohen's Own Words)

Tyler Durden's picture




 

Presented without commentary, taken verbatim from SAC Capital's just relased Form ADV Brochure

Research and Other Soft Dollar Benefits

SAC may select broker-dealers in recognition of the value of various services or products, beyond transaction execution, that they provide to a SAC Fund or SAC. Selecting a broker-dealer in recognition of the provision of services or products other than transaction execution is known as paying for those services or products with “soft dollars.” The amount of compensation (including markups, markdowns and commission equivalents on principal transactions with market-makers) a SAC Fund pays a broker-dealer who provides such services and/or products may be higher than what another, equally capable broker-dealer might charge. Any research service received through a broker-dealer may be used by SAC in connection with client accounts other than those accounts which pay commissions to such broker-dealer. The research service received by SAC, through a soft dollar arrangement, may benefit clients’ accounts, regardless of whether such account or accounts paid commissions to the broker-dealer through which such research service was received. When SAC uses client brokerage commissions (or markups or markdowns) to obtain research or other products or services, it receives a benefit because it does not have to produce or pay for the research, products or services out of its own resources. SAC may have an incentive to select or recommend a broker-dealer based on its interest in receiving the research or other products or services, rather than on its clients’ interest in receiving the most favorable execution. The extent of any such conflict depends in large part on the nature and uses of the products and services acquired with soft dollars.

SAC may use a SAC Fund’s soft dollars to acquire a variety of brokerage and research products and services. Section 28(e) of the Exchange Act recognizes the potential conflict of interest involved in this activity but protects investment managers such as SAC from claims that the activity involves a breach of fiduciary duty to advisory clients, even if the brokerage commissions paid are higher than the lowest available, if certain conditions and requirements are met. To be protected under Section 28(e), SAC must, among other things, determine that “commissions” paid are reasonable in light of the value of the “brokerage” and “research” products and services acquired. For this purpose: “commissions” include both commissions paid on agency transactions and mark-ups, mark-downs and commission equivalents paid to dealers in “riskless principal” transactions in securities under certain circumstances; “research” means products or services used to provide lawful and appropriate assistance to SAC in making investment decisions for its clients; and “brokerage” products and services that relate to the execution of a trade for SAC’s clients (including a SAC Fund) from order transmission until the delivery of securities or the credit of funds to the account.

The types of “research” SAC may acquire include, but are not limited to, the following:

  • reports on or other information about particular companies or industries;
  • economic surveys and analyses;
  • consulting services regarding products, technologies, issuers or industries;
  • recommendations as to specific securities;
  • non-mass-marketed financial publications (delivered in hard copy or electronically);
  • financial database software and services;
  • computerized pricing and market data services;
  • pre-trade and post-trade analytics, software and other products that generate market research, including research on optimal execution venues and trading strategies;
  • advice from brokers-dealers on order execution, including advice on execution strategies, market color and the availability of buyers and sellers (and software that provides such market research);
  • the portion of proxy analysis services that are reports and analyses regarding issuers and industries (but not the portion used to vote proxies); and
  • other products or services in the categories listed in Section 28(e) or regulations thereunder or SEC interpretations that enhance SAC’s investment decision making.

“Brokerage” products and services (beyond typical execution services) include, but are not limited to, the following: (i) trading software used to route orders to market centers, (ii) software that provides algorithmic trading strategies, (iii) software used to transmit orders to direct market access systems, (iv) connectivity services between SAC and an executing broker (including dedicated lines between SAC’s order management system and the executing broker, lines between the executing broker and order management systems operated by third parties, and message services used to transmit orders to brokers for execution of SAC Fund transactions), and (v) short-term custody of funds and securities relating to effecting, clearing and settling particular transactions.

SAC’s current policy provides that the use of “soft dollars” to pay for research products or services will fall within the safe harbor created by Section 28(e). SAC may, however, in the future, use “soft dollars” to pay for products or services outside of the safe harbor created by Section 28(e).

Brokers and dealers from which SAC obtains soft-dollar services or products generally establish “credits” based on past transactional business (including markups and markdowns on principal transactions, such as transactions with market-makers for NASDAQ securities), which may be used to pay or reimburse SAC for specified expenses. In some cases the process is less formal; a broker or dealer simply may suggest a level of future business that would fully compensate the broker or dealer for services or products it provides. A SAC Fund’s actual transactional business with a broker-dealer may be less than the suggested level but can, and often will, exceed that level, and credits established may exceed the amounts used to acquire products and services. This may be in part because the SAC Fund’s investment activities generate aggregate commissions in excess of the levels of future business suggested by all brokers and dealers who provide products and services. In addition, it may be in part because those brokers and dealers may also provide superior execution and may therefore be most appropriate for particular transactions. SAC may ask a broker or dealer who is executing a transaction to “step out” of a portion of the transaction in favor of a broker or dealer who has provided or is willing to provide products or services for soft dollars. That is, the executing broker or dealer will allow a portion of the overall commissions or other compensation to be paid to the soft-dollar broker-dealer. This assists SAC in acquiring products and services with soft dollars while continuing to seek best execution.

 

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Wed, 04/02/2014 - 09:45 | 4617012 digitlman
digitlman's picture

Translation?

Wed, 04/02/2014 - 09:49 | 4617031 gmak
gmak's picture

SAC uses soft dollars (ie commissions) to get research and other broker services; this is done by pretty much every buy-side fund. 

 

For example, if a Bloomberg terminal costs $12K per year, SAC gives a broker $18K in commissions  for the broker to pay for the terminal for them. 

 

 

Wed, 04/02/2014 - 09:52 | 4617041 digitlman
digitlman's picture

Thanks.

Wed, 04/02/2014 - 10:12 | 4617126 toys for tits
toys for tits's picture

As I understand it, this entire paragraph refers to charging their clients for the priviledge of being manipulated by HFT's:

“Brokerage” products and services (beyond typical execution services) include, but are not limited to, the following: (i) trading software used to route orders to market centers, (ii) software that provides algorithmic trading strategies, (iii) software used to transmit orders to direct market access systems, (iv) connectivity services between SAC and an executing broker (including dedicated lines between SAC’s order management system and the executing broker, lines between the executing broker and order management systems operated by third parties, and message services used to transmit orders to brokers for execution of SAC Fund transactions), and (v) short-term custody of funds and securities relating to effecting, clearing and settling particular transactions.

Wed, 04/02/2014 - 10:15 | 4617138 NoDebt
NoDebt's picture

I just checked my own firm's ADV II...  And, um.... we don't have any of that stuff in there.  Not sure if I should be happy or humiliated.

Wed, 04/02/2014 - 10:16 | 4617143 cifo
cifo's picture

I learned a lot from this post.

I should do the same if I wanted to be successful and make any money.

Wed, 04/02/2014 - 10:19 | 4617161 NoDebt
NoDebt's picture

Don't be too impressed.  That's pretty standard soft-dollars and revenue sharing kind of stuff.  Lots of firms do that and it really has little to do with how Stevie-Boy makes the megabucks.  

The reason my firm doesn't do that is because we chose not to accept any revene sharing or soft-dollar money from any vendor.  Makes for a much easier conversation when you talk about any potential conflicts of interest.

Wed, 04/02/2014 - 10:26 | 4617195 slightlyskeptical
slightlyskeptical's picture

So you pay for the trading platform?

I think all advisors use soft dollar benefits even if they don't realize it.

Wed, 04/02/2014 - 10:31 | 4617213 NoDebt
NoDebt's picture

We do pretty boring asset allocation stuff in my firm, and we don't trade much.  We just clear everything through TD Institutional.

Wed, 04/02/2014 - 11:27 | 4617415 Thisson
Thisson's picture

My firm has successfully recovered soft dollar commission paid using these models, in instances where the client was supposed to be paying a flat fee for services and where there was a fiduciary duty owed to the client.  So there is the potential for liability, provided certain conditions are met.

Wed, 04/02/2014 - 10:24 | 4617183 slightlyskeptical
slightlyskeptical's picture

This is mostly boilerplate stuff. I have it in my ADV and I am small potatoes. Basically if you use a brokerage to transact client business, you have to report any services the brokerage provides free of charge. Most brokerages provide most of the stuff listed to most advisors. This is much ado about nothing.

Wed, 04/02/2014 - 11:30 | 4617426 Thisson
Thisson's picture

It may be boilerplate in your circumstances.  There are plenty of other instances where this is done as a form of paying kickbacks.  I've seen it done at a major brokerage.  Trades are executed through an overpriced broker, because the firm that is having its clients overpay is receiving a financial benefit of some kind.  In one case I saw, it was because they were being granted access to an exclusive product that allowed them to receive trailing commissions.  So the agreement was basically: we'll allow you to overcharge our clients, as long as we have a way of receiving laundered kickbacks.

Wed, 04/02/2014 - 11:43 | 4617461 Orwell was right
Orwell was right's picture

Oh My!!    I've learned more from these comments than from a plethora of articles...

Thanks to Thisson and those who responded

Wed, 04/02/2014 - 09:52 | 4617042 pndr4495
pndr4495's picture

I believe the Brits call this subtle bribe a backhander

Wed, 04/02/2014 - 09:58 | 4617066 Fix-ItSilly
Fix-ItSilly's picture

Are you saying the expense shifts from the CapEx budget of the management biz to an expense to the customer?

Wed, 04/02/2014 - 10:07 | 4617109 gmak
gmak's picture

Could be.  It's a common practice to use commissions that would be paid anyway to the broker, to have a portion of them used ot pay for the fund's expenses. 

 

This is monitored by the SEC and one has to show that one is not paying higher commssions than would normally be paid. 

APparently the client benefits because the expense ratio of the fund is kept down - and the client pays the expenses, right?

Wed, 04/02/2014 - 11:32 | 4617433 Thisson
Thisson's picture

No, the client doesn't benefit by having the costs labeled as commissions rather than expenses.  The firm peddling the funds benefits because they get to report in their marketing materials that they have a low expense rate (without disclosing that as a result of this arrangement, they pay out excessive commissions to the folks executing their trades).

Wed, 04/02/2014 - 14:56 | 4618217 percyklein
percyklein's picture

The example is bad. Bloomberg terminals are inelgible for protection under Section 28(e). Not "research" and not "brokerage," generally speaking, though they might qualify for partial protection as  "mixed use" items under some circumstances.

Wed, 04/02/2014 - 09:47 | 4617018 Tinky
Tinky's picture

Odd that he would reveal his trade secrets.

s/

Wed, 04/02/2014 - 09:50 | 4617035 Itch
Itch's picture

So he's not using moving averages? hummm, interesting.

Wed, 04/02/2014 - 09:53 | 4617045 NoWayJose
NoWayJose's picture

And it would take lots of High Frequency Reading to beat the algos.  What he is saying is the way markets used to work.  Now it is all headline driven with the first one in getting the prize.

Wed, 04/02/2014 - 09:53 | 4617046 SheepDog-One
SheepDog-One's picture

Yea Stevie may be good at scamming dollars....but I guarantee I could beat him out of all his wealth on the pool table.

These people....they're only good at being crooks, that's all.

Wed, 04/02/2014 - 10:15 | 4617139 eddiebe
eddiebe's picture

Just another way Ma and Pa are disenfranchised by the quasi legal bankster-wanna-bees.

Wed, 04/02/2014 - 10:18 | 4617156 Seasmoke
Seasmoke's picture

The Tribe has pushed the pendulum too far this time. 

Mon, 04/07/2014 - 10:47 | 4632184 headhunt
headhunt's picture

You mean the communist tribe?

Wed, 04/02/2014 - 11:32 | 4617430 Squid Viscous
Squid Viscous's picture

it's only $, can't use it in hell...

Wed, 04/02/2014 - 15:36 | 4618377 annabelleballow
annabelleballow's picture

There is no evidence of that.

Wed, 04/02/2014 - 11:49 | 4617480 Notsobadwlad
Notsobadwlad's picture

SAC had (maybe still has) a large position in OPEN. For the past two years, and starting about the time that SAC took their position, regular as clockwork between every quarterly report after the quarterly noise departed, someone would manipulate the price upward, on no news, simply using their volume to move the price. There is a trail of commentary on this found in the history of the Yahoo OPEN bulletin board.

I do not know for sure it was SAC. However, it seems likely.

Wed, 04/02/2014 - 14:46 | 4618182 Bankstein Swiss...
Bankstein Swissgoldberg's picture

We re so corrupt.

Do NOT follow this link or you will be banned from the site!