As New York City was rocked by the startling news that Lehman Brothers had filed for bankruptcy and Merrill Lynch had been acquired by Bank of America, buy-side traders were gathering in San Francisco for the annual TradeTech West Conference.

While rumors flew and news stories changed by the minute, I checked in with some buy-side traders in attendance at this year's event. It seems with each new tidbit of information came a string of questions for buy-side traders—what if Lehman or Merrill was their executing broker? What if they relied on algorithms or front ends provided by these firms? How might the consolidation among these storied broker-dealers impact buy-side trading?

David Kovacs, Chief Investment Officer, Quantitative Strategies at Turner Investment Partners, says liquidity is a big concern of his. "Now as firms merge and become one, the options available to firms such as ours would be dramatically reduced and there could be some implications we can't even think about right now associated with liquidity," he explains.

"Also quality of execution and access to liquidity could be a problem. When you have multiple brokers you can find liquidity from multiple sources, with consolidation we may see liquidity diminishing," says Kovacs.

He adds that Turner measures quality of execution on a daily basis and by the end of last year the firm has noticed "a clear deterioration in the quality of execution by certain institutional firms." Kovacs and his team saw they were losing more on basket trades then ever before and began to ask questions of the firms and asking them to improve the quality of their execution.

When he didn't see big change, "we walked away and two of those firms are no longer in existence," notes Kovacs. He speculates, although emphasizes he has no proof, that some firms maybe have received orders to, "maximize profitability at any expense, including the expense of the customer."

Kovacs also points out that Lehman was a custodian for billions of dollars in hedge fund money where they provided a borrowing facility for shorted securities. That money now most likely could be gone and Kovacs sees "a definite migration to other firms as clients flee Lehman and Merrill."

Another longer-term effect of the recent Wall Street meltdown will be the research business. "The model where you go through a firm like Merrill and pay for their research, that model is dying," says Kovacs. "There is going to be massive change in the structure of how research is packaged, how it's sold and how it's paid for. I think it will completely change the scene for Wall Street firmsthey'll now have to completely modify the way they offer services and research and receive payment."

This structural change though could have a positive effect on execution quality. "Traders will have additional freedom to access fundamentals research and pay for research and this will allow them to separate between trading and paying for research," explains Kovacs. "I think this will be a positive because when you separate trading and quality of execution from paying for research I think it will improve the quality of execution."

Another attendee at the TradeTech West event, Michele Debiche, President and CEO of Quantia Capital Management, shares his views as well. "One big issue will be what happens to OTC derivatives in which Lehman is a counterparty - who controls the money? And how much will other counterparties suffer?"

He adds, "Longer term this may also cause a move towards more exchange-traded derivatives."

Debiche also points to another big issue for the buy side " Commission Sharing Agreements or CSAs. "What happens to the pools accumulated by accounts at Lehman?" he asks. Although answers are few and far between at this point, the buy side will definitely be seeing some changes.

As Debiche concludes, "It often happens on Wall Street that when the going is good greed overcomes realistic assessments of long term risk but when the fall comes it tends to be very fast and very big."