Lehman's Fidelity Feast Gives Street Pangs

The highly publicized decision to reduce the trading fees it charges Fidelity Investments is paying off for Lehman Brothers(LEH), and that's troubling news for its competitors.

Lehman, which last fall broke with Wall Street by separating the fees it charges Fidelity for stock trading and stock research, has seen an increase in trading volume from the world's biggest mutual fund family, an investment banking source told TheStreet.com.

The windfall illustrates the logic underlying Lehman's decision to "unbundle" research and stock trading, which traditionally have been sold as a package on Wall Street. It also shows how the move could force the hand of other securities industry firms to either unbundle their own research or find better ways to market and deliver it.

Representatives from both Lehman Brothers and Fidelity declined to comment.

In October, Lehman Brothers became the first Wall Street firm to publicly say it would unbundle its research and trading services when the company cut its deal with Fidelity. Since then, other brokerage houses have lost significant market share to Lehman in equity trading, a senior investment banker says.

Many bankers were shocked by the deal that Lehman struck with Fidelity, particularly because the $7 million flat fee that Fidelity is paying for Lehman research seems like such a bargain.

But for Lehman, whose research department isn't exactly a crown jewel, the motive was clear. By separating the cost of research from its trading fees, Lehman is able to remove a significant drag on its trading desk, which is one of Wall Street's finest. A big customer like Fidelity -- which previously bristled at having to pay for Lehman's research in order to trade through the brokerage -- is now free to trade as much as it wants for much less money.