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March 1, 1999

Working in the Middle

By Michael L. O'Reilly

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  • Working in the Middle

Peter Hoffmannbeck doesn't meet with his portfolio managers very often.

As the senior equity trader at the Ohio Bureau of Workers' Compensation in Columbus, Hoffmannbeck knows all of the firm's 35 equity managers.

But he sees them only about once or twice a year.

That's because Ohio Bureau's $17 billion in assets are managed externally by some of the leading money managers around the country. Of the firm's $17 billion in assets, $7 billion are invested in equities. The firm has 14 employees, including Hoffmannbeck and fellow equity trader Bob Koci.

Hoffmannbeck himself interacts with his portfolio managers mostly over the telephone.

"There are large institutions in our mix from cities across the country," he said. "It may take a little longer to know a manager mostly just over the telephone, but we develop a good relationship where both sides know what to expect."

Hoffmannbeck said most portfolio managers come to Columbus once or twice a year to meet with Ohio Bureau management. He takes time to learn the managers' style, so that he knows the best way to handle their orders.

In most cases, a portfolio manager will call Hoffmannbeck with a buy or sell order, allowing the desk full discretion to work the order.

Hoffmannbeck said his desk averages about 25 trades a day, ranging in sizes from 500 to 500,000 shares. His desk handles large block orders each 100,000 shares or more roughly five times a day. Most of Ohio Bureau's equity assets are invested in New York Stock Exchange stocks. For small NYSE orders, Hoffmannbeck uses the Big Board's SuperDOT system for quick executions.

Working for a state agency where the budget is closely watched Hoffmannbeck is forced to keep costs down on the trading desk with soft-dollar arrangements.

"There are difficulties working for a government agency in keeping costs low," he said. Hoffmannbeck enters into soft-dollar arrangements with brokers for accounting systems, quotes and analytics. "I can't think of any other desk that doesn't soft systems and analytics," he said.

Nevertheless, Hoffmannbeck recently reduced his soft-dollar business, from 20 percent to ten percent of his orders. He said a lot of the soft-dollar products weren't being utilized, with costs outweighing benefits.

"I don't believe executions should suffer with soft dollars," Hoffmannbeck added. "You need to look at payment and make sure it's not driving up execution costs."

Ohio Bureau directs 60 percent of its orders to broker dealers based in Ohio. Ten percent are directed to minority brokers. Although the firm directs a majority of orders, Hoffmannbeck does have a number of options. There are 20 Ohio brokers and 20 minority brokers on his list. He trades with about ten Ohio brokers regularly, and as many as 15 minority brokers.

For the remainder of his orders, Hoffmannbeck has a list of 45 non-Ohio brokers, and he regularly sends orders to 15 of them.

Hoffmannbeck said his desk works with about 35 brokers daily. He rarely asks a broker to commit capital for a trade. Instead, he enjoys the flexibility of working orders without obligations to specific brokers for capital.