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July 31, 2001

Salomon's Gateway To Nasdaq Liquidity System Automates Retail and Hunts for Liquidity

By Peter Chapman

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  • Salomon's Gateway To Nasdaq Liquidity System Automates Retail and Hunts for Liquidity
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Salomon Smith Barney wants to kill two birds - one retail and one institutional -using a stone called GATE.

Last month, the big brokerage deployed a homegrown trading system dubbed Global Advanced Trading Engine, or GATE, on its Nasdaq desk to automate the handling of its retail order flow and improve the hunt for liquidity for its institutional orders.

It was designed to enable the desk to trade more stocks without adding more bodies, and to cope with a faster-than-ever Nasdaq trading environment brought on by decimalization and SuperSOES.

Functionally, GATE combines position management and its complement, profit and loss reporting, with quote management. At Salomon, it replaces Tools of the Trade; most of the features of the Nasdaq Workstation; and a mainframe the firm used for position-keeping. It does not replace the firm's EDTS system which sales traders and position traders use to manage orders.

Conceived last summer when bulge-bracket firms were snapping up wholesalers for their Nasdaq capacity, GATE was Salomon's means to the same end. Goldman Sachs bought Spear, Leeds & Kellogg; Deutsche Bank bought NDB Capital Markets; and Merrill Lynch bought Herzog Heine Geduld. Salomon bought nothing, although it was rumored to be interested in the Knight Trading Group.

"We decided to pursue an internal strategy," said Amit Chatterjee, managing director, deputy head of equities e-commerce, who along with Dave Weisberger, managing director, responsible for Salomon's market making platform, spearheaded the project. "But we wanted to grow our market making operation without adding a lot of human traders."

Apparently that's how things have worked out. Salomon, one of the top four equity traders on the Street as ranked by AutEx BlockData, now trades 1,300 Nasdaq stocks. That's an increase of 300 since last summer, according to Chatterjee, who says the ramp-up did not involve an accompanying increase in headcount.

Chatterjee won't comment on how many stocks - Nasdaq or listed - the firm plans to ultimately trade, but does say GATE has the capacity to execute one million trades per day. Salomon now processes, on average, 300,000 Nasdaq and listed trades daily, he noted. The firm has no plans to deploy GATE on its listed desk this year, according to Weisberger, but the architecture will permit that "if and when we choose to do so."

Adding more stocks to its line-up means filling more small orders. Salomon's expansion plan will not beget many more block-sized orders because it already trades the most liquid, institutionally-desirable names in the Nasdaq NMS.

Managing Fills

Most retail-sized orders are filled automatically, but those fills create positions that must be managed. For Salomon to manage those positions without adding more traders it must increase the pads of its existing traders. Each currently hold between 25 and 50 stocks, according to Chatterjee. So, to avoid burdening traders with more stocks to watch, GATE watches them instead.

GATE monitors a trader's long and short positions and alerts him if they get too large. It can also be programmed to automatically enter the market and buy or sell stock if necessary. Traders set parameters that delineate their comfort zones-plus 1,000 shares or minus 1,000 shares, for instance-but GATE does the actual monitoring. The trader is freed to concentrate on his large orders.