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September 30, 1998

The Second Time Around

By Michael L. O'Reilly

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  • The Second Time Around

John W. Keller is having more fun the second time around. Keller is head trader at Mellon Equity Associates in Pittsburgh. The firm is an asset-managing arm of Pittsburgh-based Mellon Bank. He joined Mellon Equity in 1994 to build its trading desk.

The task was old hat for Keller. Six years earlier, he had built the Richmond trading desk of the Virginia Retirement System (VRS).

"Mellon Equity was a great opportunity. It was bigger fish to fry," Keller said. "My experience at VRS was invaluable when I set out to build the desk here."

Before Keller arrived, Mellon Equity's trades for the institutional accounts of corporations, public funds, health plans and endowments were done by Mellon Bank's trust department. But in early 1994, with Mellon Equity growing in size, the firm decided to focus more on trading.

Today, Keller and two other traders handle the orders for Mellon Equity's eight major products. The firm has just under $22 billion in assets under management, with 80 percent invested in equities. The portfolios are handled quantitatively and monitored by seven managers. The firm is also a sub-advisor for Dreyfus Institutional Investors, a mutual-fund subsidiary of Mellon Bank.

"Mellon Equity offered a unique opportunity," Keller said "Because we're a quant shop, I was given the chance to implement cutting-edge technology on the desk."

Mellon Equity's portfolio managers work with a quantitative computer system that ranks more than 3,600 stocks. The system using complex mathematical models programmed as rules ranks stocks on a scale of one to ten, ten being the highest ranking. Looking at up to 15 factors per stock, it is computer-driven asset management.

The portfolio managers have a preset formula for each of the products. Based on its rankings, the system picks stocks to buy or sell when rebalancing the portfolios. The firm has a strict schedule for rebalancing to the preset formula. The portfolio managers meet with Keller weekly to readjust the products.

When he arrived in 1994, Keller wanted to create a desk to fit seamlessly into Mellon Equity's quantitative management.

Almost immediately, he implemented Predator order-management software from the Boston-based MacGregor Group to serve as the heart of the desk.

Up and running by the end of 1994, Predator is integrated with the firm's accounting and portfolio-management systems. It also routes orders directly to liquidity sources.

"It does all of our clerical work, and it has brought errors down to nil," Keller said.

Keller has a core of 20 brokers he maintains relationships with. But most of his order flow is handled electronically, by Reuters Holdings' Instinet or New York-based Investment Technology Group's POSIT, among others.

Strong performance in small-cap products earlier this year caused Mellon Equity to add more-specialized regional firms to its list of brokers.

"The 20 brokers allow us to be flexible and get best execution," Keller added. "We want relationships with forward-thinking people."

Keller credits much of the success in implementing new technology on the desk to Mellon Equity's portfolio managers.

"I get complete support from my portfolio managers. We have close relationships," Keller said. "It's less confrontational because the system helps to make a lot of decisions. There are no star managers. No prima donnas."