Free Trades Can Really Cost You

Before he went to prison last week, Ross McLellan, a former State Street Corp. transition management executive, did a series of interviews about his downfall with Kip McDaniel at Institutional Investor. The way transition management works is that some client—a pension fund, etc.—wants to sell some giant portfolio and buy some other, similar yet different giant portfolio. They will go to a transition manager like State Street, which will do the buying and selling for some infinitesimal fee, one or two or sometimes zero basis points of the portfolio.

What does “do the buying and selling” mean? It might mean that you take all of the client’s bonds, poll banks for the highest bids for them, sell them to the highest bidders, take the money, poll banks to get the lowest offers for the bonds the client wants, and buy the new bonds from the banks with the lowest offers, and deliver the new bonds to the client at the price you got. You act as a pure agent, finding the buyers and sellers, and your compensation is your fee of one or two or zero basis points.