Lehman Brothers ends stock commission for convertible accounts; move may have doubled shop's volume

By Kenneth Lim

Boston, Jan. 18 - Lehman Brothers on Thursday stopped charging a commission on stock transactions for convertible accounts, and market sources say other trading houses could eventually follow suit.

"They'd have to, right?" a buyside convertible trader said. "When one of the guys starts lowering prices, you're forced to do the same. I would imagine at some point somebody else will fall and it will be like dominos."

With little fanfare, Lehman on Thursday told its convertible clients that it will not collect commissions on stock trades for outright and hedge accounts. Lehman is the only major convertibles shop to adopt such a "net-market" system. A number of rival convertible shops declined to comment on the matter.

Buysiders, however, were ecstatic about the change.

"It's great!" said a hedge fund portfolio manager. "It's going to be very hard for me to do business with someone who's asking me to pay fees versus someone who lets me do it for free."

A convertible fund trader said "it not only makes them look good but also insures people are more likely to go to them first in an attempt to trade."

The trader said Lehman was believed to have traded $600 million in convertibles on Thursday, about 20% of the market, and wondered if it was possible for them to corner the sector. But the trader also wondered if the good news will last.

"I wonder how long it will last however - those fat margins will become next to nothing fairly soon when they do not get paid to trade stock," the trader said.

A sellside trader at another desk thought the move was probably good for the industry as a whole.

"I know a lot of people who would just rather see it that way because it creates a lot more transparency," the sellsider said. "It's probably better for the industry."

The buyside convertible trader who thought the other shops will also change said buysiders could stand to save 2% to 4% if every convertible shop adopts the change. For the moment, Lehman stands to win over business in more generic names, the trader said.

"Ultimately you still have to cross on names," the trader said. "But if there's a fairly generic name that I can match with five different guys...naturally I'd go with Lehman."

The trader, who said Lehman was believed to have started looking into making the move a few months ago, thought that the time was ripe for such a change.

"You'll have to find some other way to add value," the trader said. "It makes sense to me. In fact, buyers and sellers, they could have just traded with each other if they wanted to cut out these guys. We ultimately would have cut them out completely. There's just so much competition on both sides of the ball for them."

A person familiar with the move said "I've heard that they've [Lehman's] got a doubling in volume today."

Lehman probably "figured that it needed to go on the offense around changing the market structure and making the market structure more transparent and easy to understand," the source said.

"It makes executing business with Lehman a very easy and straightforward thing by not charging commission," the source said.

The source called the move a "pretty radical step."

"I just think some people are inverting markets because there's a commission," the source said. "Some people are charging one cent to trade, some people are charging five cents...but now whatever is quoted is just your execution cost, outright and on swap."

Lehman had no statement on the move.

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