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Brijesh Malkan
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Solving the Last Mile Problem in Investment Research

One executive takes a forward look at how will the research value proposition change over the short to medium term, and what are the products and strategies managers will turn to?

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July 31, 2000

At Deadline

By John A. Byrne

Goldman Rules

Goldman Sachs may be the Michael Jordan of quality executions. The 2000 Reuters Survey of U.S. Mid to Smaller Companies, published by Tempest Consultant, ranked Goldman as the number one broker dealer in the overall execution of its listed and Nasdaq trades. Goldman earlier received the top ranking in the Reuters' U.S. Larger Company Survey.

"We put our customers first and are committed to excellence," said Jody G. Mansbach, head of the small cap trading desk at Goldman. The complete poll was based on the responses of 536 mid- to small-cap corporations, as well as 374 sell-side analysts and research salespeople. Merrill Lynch & Co. had the best broker research based on responses from fund management groups and corporations. Corporations adjudged Steve Wilson of Reich & Tang Capital Management the best individual fund manager and said Fidelity Investments had the best fund management group.

Rebates

Datek Online Brokerage Services is putting money on the line for its customers. The scrappy Iselin, N.J.-based online broker is rebating the money it receives from dealers for its order flow. Under the new policy, Datek reckons it will rebate about $1 million to customers in order flow payments so far this year. No other major brokerage firm has Datek's policy, observers say. But some firms, under competitive pressure, may be forced to change policies.

"Our unique rebate policy illustrates that our business does not depend on order flow payments," said Ed Nicoll, chief executive at Datek Online. "We agree with industry regulators who have pointed out that brokers that accept such payments appear to place their profitability ahead of providing customers with the best possible execution."

Order flow payments were said to represent a tiny 0.5 percent of Datek's revenue last year. In contrast, Menlo Park, Calif.-based E*Trade, is said to have generated almost $40 million in order flow payments last year, or roughly 11 percent of its revenues. Most of Datek's trades are routed to its affiliated Island ECN. Despite Datek's rebate policy, there is no sign of rivals following suit. But the pressure must be on. E*Trade did not return several telephone calls for comment.

UBS Purchase

Switzerland's number one bank is buying the fourth largest U.S. brokerage firm for $10.8 billion in stock and cash. The Swiss behemoth, UBS Warburg, which manages about $1 trillion in assets, plans to maintain PaineWebber's brand name and keep its management team in place.

What's the overlap between UBS's and PaineWebber's equity trading units? "The consolidation of trading, research, sales, and investment banking will have the obvious residual impact," said Dean Eberling, a brokerage analyst at Keefe Bruyette & Woods, "The [overall] head counts will go down and businesses will be shifted around."

Some industry pros say PaineWebber's trading department will be transferred to Stamford, Conn., where UBS's trading outfit is based. Eberling thinks that's a "strong possibility." Trading bosses at PaineWebber are not saying. Patrick Davis, head of Nasdaq and OTC trading, and Robert Harrington, head of the listed desk at PaineWebber, declined to comment.

PaineWebber's Donald Marron, an avid art collector, will be well rewarded for his role in the acquisition. The 66-year-old chief executive will pocket $60 million over the next three years working on the transition. Marron has also reportedly received permission to manage a private pool of money that could land management fees of more than $10 million each year.

Nasdaq Fees

The fees paid by market makers for executions on Nasdaq are likely to tumble under a plan for the introduction of SuperSOES. As currently envisaged, Nasdaq market makers would no longer pay for each transaction on SOES. Up to now, both market makers and order-entry firms each paid $0.50 for each side of the trade.

Under the new arrangement, only the total number of orders the market makers and order-entry firms route monthly will be assessed. Nasdaq will charge $0.50 for the first 150,000 orders under 2,000 shares; $0.30 for all subsequent orders under 2,000 shares; and $0.90 for all orders over 2,000 shares. SelectNet fees will remain unchanged.