Jared Dillian
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The Liquidity Problem

Maudlin Economics Jared Dillian examines stock market liquidity.

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April 1, 2000

Cover Story: Back to the Future

By Peter Chapman

Misera noted that the primary goal at First Union is not dealer profits. "We do no proprietary trading," Misera said. "Our traders trade to facilitate the client. But that does not mean they are not opportunistic."

"Every trader is opportunistic," he added. "But they run one set of books. They do not have a proprietary book." (Unlike traders at large wholesalers who are compensated on their trading profits, First Union's take a salary and a bonus which is based mostly on subjective measures.)

Holter contended that First Union does not "trade against retail." Some bulge bracket players have made profits on large flows of retail orders using the aggregation of that order flow to enhance its positions. That's the so-called informational advantage.

"We trade with retail," Holter said. "We do not make net dollars off our retail. Our interest is price improvement. We're happy to generate commission dollars for the bank."

Misera added, "We don't make a cent on retail. We do not capture any spread on it. Whatever price we get, the customer gets."

(In any event, some observers note that it can be difficult for smaller players like First Union to trade against retail flows since the informational advantage is much less defined than at larger desks.)

On the retail side, George Jennison's experience could prove helpful. Jennison serves as a liaison between retail brokerage and the equity capital markets group.

Jennison, for instance, might recommend that the desk trade a stock on a principal instead of an agency basis if he sees a steady flow of retail orders from a branch. "He understands the demands the retail system makes on us," Misera said. Jennison will also collaborate on the quality of executions.

Automatic Execution

Most of First Union's retail order flow is executed automatically. That plays well with the experience of the ex-Alex. Brown pros where volume came mostly from institutional trades. "Retail is not labor intensive," Holter said. "All of our intellectual capital is focused on the institutional business. At Alex. Brown we were known for doing things quietly. That won us a lot of large institutional trades."

Holter said the First Union desk has the ability to do that again. "We have a small and close group of people we all trust," he said. "It is easy to control access to information. We feel we can get out there and find the buyers without letting the wrong people know we've got stock for sale."

Murphy said his team is not seeking to make a profit on each block trade. The desk is more conscious of servicing the bank's institutional clients.

"You always want to make money," Murphy said, "but the institutional business isn't that easy. Margins are tight."

In the end, he said, the customer comes first. "These [institutional] customers are important accounts for the bank, so we don't have to make money on each trade," Murphy said. "We'll do what's good for the bank."