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April 1, 2001

ECN Takes Unusual Road

By Editorial Staff

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  • ECN Takes Unusual Road

Richard Schenkman is chief executive officer of the BRUT ECN. He was previously chief operating officer at Instinet and spent 15 years there before joining the broker-friendly' electronic communications network in May 2000.

BRUT is owned by systems vendor SunGard and 29 broker dealers including Morgan Stanley, Goldman Sachs, Merrill Lynch, Salomon Smith Barney and Bear Stearns. Best known for facilitating inter-dealer Nasdaq trading, BRUT in the last six months, has stepped up its courtship of the buyside.

BRUT, formed in 1998 and enlarged by last year's merger with STRIKE Technologies, is one of six ECNs which control the lion's share of ECN trading. The others are Instinet, Island, Archipelago, REDIBook and Bloomberg TradeBook. Schenkman sat down with Traders Magazine reporter Peter Chapman to answer questions about BRUT's strategy.

Traders: BRUT is going down a different road than its competitors. Please explain why.

Schenkman: Certainly. Two camps are evolving. One group of ATSs is focused on disintermediation. They're bringing buyers and sellers together, but, in doing so, they're creating a wedge between an investor and his agent. They are using the execution function to compete for the client against the traditional broker. ECNs in this category are Archipelago, Instinet, Bloomberg TradeBook, and Island, through the Datek connection.

This competition produces value for a user, but it also produces conflict. A user must choose either the value he receives from his traditional broker - research, deal flow - or that which he gets from an execution-provider. It's an or' choice.

Traders: How is BRUT different?

Schenkman: We are offering investors an and' choice. BRUT is putting together the relationships that the traditional brokers have with the solution of an electronic execution provider.

Traders: How are you doing that?

Schenkman: I'll give you one example. In our dealings with institutions we enter into a commission sharing arrangement with the broker. We get a portion [of the commission] and the broker, chosen by the institution, gets a portion. That commission goes to the relationship that the institution has with that broker.

Traders: You are partnering with brokers?

Schenkman: Yes. In most cases, the broker finds the customer. We get referrals. They target their customers who are trading electronically.

Traders: So the customer gets an electronic execution, but preserves its relationship with the broker.

Schenkman: Exactly. Remember, the institution only has so much to pay out in commissions. And he is going to trade electronically.

Traders: What does it mean in dollars and cents?

Schenkman: [An institution] will go to its traditional broker, pay five cents and maybe get research and other value-added services. It will not get an electronic execution. If it uses an ECN to trade it will pay two cents and get the value it perceives in an electronic execution - anonymity, neutrality and control. What we are saying is: pay us three cents and we will send two cents to the broker of your choice. We get the entire three cents because the institution wants all of the services an ECN provides. We have the relationship with the institution, but are sponsored by the broker.

Traders: Why would brokers steer business to an electronic competitor like BRUT?