Give up: Meaning, Criticisms & Real-World Uses

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What Is Give Up?

A "give up" refers to an arrangement in the financial industry where a brokerage firm executes a trade for a client but then "gives up" a portion of the commission to another brokerage firm. This practice falls under the broader category of financial regulation and specifically relates to how investment advisers compensated broker-dealers for services rendered. The practice historically involved a third party—often a research provider—receiving a share of the commission without directly executing the trade.

Give-ups became a notable mechanism for money managers to pay for research services or other services beyond simple trade execution. This practice often involved complex arrangements where a broker would execute a transaction and then direct part of the commission to a third-party firm that provided research or other benefits to the investment manager.

History and Origin

The concept of give-ups is deeply rooted in the historical structure of commission rates in the U.S. securities industry. Prior to May 1, 1975, often referred to as "May Day," commission rates on U.S. stock exchanges were fixed. This meant that all brokers charged the same commission for a given transaction, regardless of the size or complexity of the order., Th¹⁷i¹⁶s fixed-rate system, in place since the Buttonwood Agreement of 1792, created an environment where competition on price was not possible.

As¹⁵ a result, brokerage firms competed on services, including providing valuable research to institutional clients. Giv¹⁴e-ups emerged as a way for money managers to direct a portion of these non-negotiable commissions to other brokers or third parties that provided them with additional services, such as research, even if those parties did not directly execute the trade. The¹³ Securities and Exchange Commission (SEC) abolished fixed commissions on May Day 1975, a transformative event that ushered in an era of negotiated commissions and significantly changed the landscape of brokerage compensation.,

#¹²#¹¹ Key Takeaways

A give-up is a historical practice where a portion of a trading commission was directed to a third party, typically a research provider.
The practice was prevalent when fixed commission rates were in effect in the U.S. securities markets.
Give-ups allowed investment managers to pay for research and other services using client commissions, rather than directly out of their own fees.
The abolition of fixed commissions on "May Day" in 1975 largely eliminated the need for give-ups in their original form.
Modern regulations, such as Section 28(e) of the Securities Exchange Act of 1934, now govern how investment managers can use client commissions to pay for research and brokerage services.

Interpreting the Give Up

The interpretation of a give-up in historical context revolves around understanding its role in a fixed-commission environment. It was a mechanism to allocate value beyond simple trade execution. For an asset management firm, directing a give-up meant recognizing the value of services provided by a third party, such as independent research houses, even if those services didn't involve directly handling the trade.

The practice reflected the intricate relationships and compensation structures that existed before commissions were deregulated. It highlighted the importance of research and other ancillary brokerage services to institutional investors and their portfolio management strategies.

Hypothetical Example

Consider a hypothetical scenario before May Day 1975. An investment adviser managing a mutual fund decides to buy 10,000 shares of XYZ Corp. They send the order to Brokerage Firm A, which executes the trade. Under the fixed commission rate structure, the total commission for this trade is $500.

However, the investment adviser greatly values the in-depth industry research provided by Research Firm B, which is not a broker-dealer. To compensate Research Firm B, the investment adviser instructs Brokerage Firm A to "give up" $100 of the $500 commission to Research Firm B. Brokerage Firm A processes the trade, keeps $400, and remits $100 to Research Firm B. This arrangement allowed the investment adviser to pay for the valuable research using the client's trading commissions, rather than directly out of the advisory fee.

Practical Applications

While direct give-ups in their pre-1975 form are no longer common due to the shift to negotiated commissions, the underlying principle of using client commissions to pay for research and execution services continues through "soft dollar" arrangements. Section 28(e) of the Securities Exchange Act of 1934 provides a "safe harbor" that allows investment managers to pay more than the lowest available commission for brokerage and research services, provided they make a good faith determination that the commission is reasonable in relation to the value of the services received.,

T¹⁰h⁹is means that while a "give up" as a distinct mechanism has largely disappeared, the ability for an investment manager to compensate a broker for research and other services via commissions, rather than solely for the bare cost of trade execution, remains a critical aspect of financial markets. Mod⁸ern institutional trade processing platforms, such as those provided by DTCC, also facilitate the complex allocation of costs and services within the post-trade lifecycle, though distinct from the historical "give up" concept.,

#⁷#⁶ Limitations and Criticisms

The practice of give-ups, particularly in the era of fixed commissions, faced significant criticism. One primary concern was the potential for conflicts of interest. Inv⁵estment managers had an incentive to direct trades to brokers who provided the most valuable research or other services, rather than necessarily those who offered the best execution price for the client's trades. This could potentially lead to higher costs for the client or suboptimal trade placements. Cri⁴tics argued that clients' interests might not always be prioritized when commissions were used to subsidize services that primarily benefited the investment manager.

Fu³rthermore, the lack of transparency in give-up arrangements made it difficult for clients to understand how their commission dollars were being spent. While Section 28(e) was introduced to provide a framework for these arrangements, the ambiguity and potential for misuse remained subjects of debate and regulatory scrutiny, prompting the SEC to issue further interpretive guidance over the years.,

#²#¹ Give Up vs. Soft Dollars

The terms "give up" and "soft dollars" are closely related but represent different aspects of brokerage compensation for non-execution services. Historically, a give up specifically referred to a situation where a brokerage firm executing a trade would "give up" a portion of the fixed commission to another firm, often a research provider, that did not participate in the trade execution. This was a direct reallocation of a predetermined commission amount.

Soft dollars, in contrast, are a broader concept encompassing the practice where an investment adviser uses client commissions to pay for research and brokerage services that benefit the advisory accounts. While the historical give-up was a form of soft dollar arrangement, the modern soft dollar landscape operates under negotiated commissions. Under Section 28(e) of the Securities Exchange Act of 1934, investment managers can pay a broker more than the lowest available commission if they receive research or other services that benefit their managed accounts, provided they act in good faith and determine the commission is reasonable. The key distinction is that "give up" refers to the pre-deregulation practice of sharing fixed commissions, while "soft dollars" describes the ongoing use of client commissions to pay for research and execution services in a negotiated commission environment, governed by specific regulatory frameworks.

FAQs

Why were give-ups used?

Give-ups were primarily used in the era of fixed brokerage commissions to compensate third-party providers, often research services firms, that offered valuable analysis or other services to investment advisers. Since commission rates were non-negotiable, give-ups allowed for a form of indirect payment using client trading commissions.

Are give-ups still legal today?

The specific practice of "giving up" a portion of a fixed commission, as it existed before 1975, is no longer relevant because commissions are now negotiated. However, the concept of using client commissions to pay for research and brokerage services persists under what are known as "soft dollar" arrangements, which are regulated by Section 28(e) of the Securities Exchange Act of 1934.

How did give-ups impact investors?

For investors, give-ups meant that a portion of the commission paid on their trades was used to cover services for their investment adviser. While the intent was often to secure better research that could lead to improved investment performance, the practice raised conflicts of interest because it could incentivize managers to prioritize service providers over achieving the absolute lowest execution cost.

What is the primary difference between a give-up and a soft dollar arrangement?

A "give up" specifically refers to the historical practice of sharing fixed commissions with a third party. "Soft dollars" is a broader term encompassing the use of client commissions to pay for research and brokerage services. While give-ups were a type of soft dollar arrangement, modern soft dollar practices occur within a system of negotiated commissions and are governed by regulatory safe harbors like Section 28(e).