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January 1, 1998

A Student of Trading

By Michael L. O'Reilly

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T Erik Conley, head of the active equity trading desk at The Northern Trust Company in Chicago, has always fancied himself an advanced student of trading.

Conley, articulate and well-informed, pushes himself to stay ahead of industry trends. He is a voracious reader of trade publications and immerses himself in technology shows and market-structure debates. "Trading is the most challenging thing I've ever done," Conley said.

"I'm matching wits with the best and the brightest," he added. "So I try to learn something every day, and use my experience to my advantage."

Conley works hard to keep transactions consistent with his portfolio managers' projections. "I once read that the skill of discovering undervalued stock was in abundance on Wall Street," Conley said. "What distinguishes money managers is trading cost. A good trader's job is to find liquidity, lessen market impact and execute at the lowest possible cost. My goal is to capture a manager's envisioned return."

At Northern Trust, staffed with more than 200 money managers, Conley is held accountable by many of them for best execution.

The Northern Trust Company is the principal subsidiary of Northern Trust Corporation, a Chicago-based multibank holding company. The parent has 64 U.S. offices and 7,250 employees worldwide. Total assets under administration was $898.4 billion in 1997. Northern Trust, the subsidiary, is an Illinois-chartered commercial bank founded in 1889. Northern Trust has $158 billion in assets under management, $47 billion of which is invested in equities.

Equity investment at Northern Trust is divided between two trading desks. The passive desk, staffed by two traders, engages in informationless trading and manages $20 billion in index products. The two traders keep portfolios consistent with the major stock indices.

The active desk, headed by Conley, manages $27 billion in assets. Conley and two traders execute orders for Northern Trust's money managers.

Having begun his career on the sellside, Conley has an understanding of how buy-side traders work with broker dealers for execution.

From his perspective trying to capture portfolio managers' envisioned returns by transacting executions at the right price Conley uses two judicious approaches to trading.

"Certain situations call for speed in trading, usually when a portfolio manager has a strong conviction a stock will overperform," Conley said. "In those situations, the best way to accomplish our execution is to ask a broker partner to commit capital and to provide liquidity."

Conley is careful not to overuse that tactic, having been on thesellside. If a broker loses money too often by committing capital, Conley said, they become reluctant to trade with you.

When speed is not paramount, Conley looks to black boxes as alternative sources of liquidity. "ECNs [electronic communications networks] are a good source of liquidity and carry little market impact." Conley said.

After graduating from Marquette University in Milwaukee in the late 1970s, Conley got a job on the sellside as a trader at Blunt, Ellis & Loewi in Milwaukee. He worked at the firm for 15 years, devoting his last five years to building a convertible arbitrage fund. As head trader for that fund, his approach was one of a buy-side trader.