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April 30, 2000

Merrill's Jersey Trading Expansion

By Peter Chapman

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  • Merrill's Jersey Trading Expansion

Merrill Lynch & Co. is planning to relocate its sprawling Nasdaq trading operations from the World Financial Center in New York to a site in New Jersey, where it will substantially increase its market-making business.

"We take pride in the 'Merrill Execution', said Tom Joyce, a managing director of Nasdaq trading at Merrill. "That's why we want to execute more of our orders ourselves."

The move across the Hudson would see Merrill making markets in 2,000 stocks by early next year, up from 550 today. The ambitious plan, reversing a trend that saw Merrill making markets in fewer stocks, has opened competition among technology suppliers for Merrill's lucrative contract.

Joyce said the firm has narrowed the field down to "two or three" vendors. The core functionality of their technology is order routing, order management and position management. The selection process, which began earlier this year with eight or nine vendors, is slated to end this month.

Merrill currently uses the BRASS system from Automated Securities Clearance. Joyce declined to say if the industry's top trading software vendor is on its short list.

While BRASS is used by about 150 market makers, a slew of rival products have surfaced in recent years. The rivals include OneWorld, formerly TCAM, from OM Technology; Fidessa from Royal Blue; Eagle Trader from Spear, Leeds and Kellogg unit Eagle Software Products; TT Exchange from Trading Technologies; and similar technology from start-up Avtec.

Observers note that Merrill's move is part of an industry revival of sorts in market making. As noted in the Market Maker Survey in this issue, lower commissions on retail orders are forcing wirehouses like Merrill and Salomon Smith Barney to take more of their profits from principal trading.

Merrill would internally execute orders for those additional 1,450 stocks rather than route them to other market makers. This development is in sharp contrast to a trend of recent years that saw market makers dropping stocks. The order handling rules and teenie increments narrowed spreads, making stock dealing less profitable.

Merrill dropped 300 stocks in September 1997 partly for that reason, Joyce said.

The latest trends in the retail market are pushing Merrill in the direction of more internalization of Nasdaq order flow, he said. But he points out that customer satisfaction is a big consideration too.

Merrill said it is not satisfied with the quality of the fills it is getting on its agency trades. "One of the biggest challenges we face is handling the order flow we don't make markets in," Joyce added. "There are just too many variables involved from the time we get the customer order until the time he gets his report." Merrill routes out 25,000 of the 150,000 orders it receives every day.

While Merrill is aiming for quality it knows it needs computer muscle to handle quantity. Part of the reason it dropped 300 stocks in 1997 is the limited scalability of its trading platform. As volume surges, capacity can't be increased as easily. Joyce said recent volumes have also strained its system.

The new platform, which will take its trading room architecture from a mainframe environment to one that is more distributed, is expected to be much more scalable.