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November 1, 2001

Evolution of the Species

By Sanford Wexler

A buyside trader must be a jack of all trades, according to David L. Brooks.

Once he was regarded as a glorified order clerk, said Brooks, 32, head trader at Boston-based Boston Company Asset Management, a subsidiary of Mellon Financial.

How times have changed. "Now, you need to be a technology expert, a systems integrator, a market technician, a moderator between portfolio managers and brokers," he said.

Revolution

The buyside must also respond to the revolutionary changes on the sellside. A fear among the buyside, Brooks contended, is that many dealers will abandon market making unless Nasdaq transforms itself into a more agency-based market.

"Dealers may cut back the number of stocks they make markets in," he said. "Some may get out of the business altogether."

Sure, the introduction of decimalization has frustrated traders, but Brooks thinks that the challenges now are not as threatening. "The buyside has figured out how to pro-actively work in this new environment," he said.

"There are competing systems that are taking away the New York Stock Exchange's market share," he added. "The specialists are waking up to the new reality that they cannot continuously front-end our orders."

Brooks cited Liquidnet as one system that is making it possible for the buyside to achieve better executions. "It [Liquidnet] has been a tremendous tool for the buyside to find large pieces of natural liquidity," he said.

Thanks to decimalization, spreads on many Nasdaq stocks have become so thin that broker dealers are finding it almost impossible to turn a significant profit on an increasing number of trades.

Brooks, like a growing number of those on the sellside, believes it would be better for dealers to trade more Nasdaq transactions on an agency basis.

"If we move into an environment where a majority of Nasdaq dealers are no longer trading as principal anymore," Brooks explained, "then you are going to need a listed market structure to prevent trading through the market."

"I don't think that for the long term the brokerage community will be able to change the way it handles Nasdaq business without the market structure changing as well," he added.

Born in Clinton, N.Y., and raised in Amherst, N.H., Brooks earned an undergraduate degree in international economics from Georgetown University in Washington, D.C., in 1990. A year later, he joined the operations department at State Street Research in Boston. Brooks worked his way up to become a junior trader.

In January 1998, he joined the Boston Company. Today, Brooks manages a desk that has five traders. His desk has relationships with some 80 broker dealers, but it uses only 20 on a regular basis.

The Boston Company has $17.4 billion in assets, all in equities. The clients include Mellon Financial's Dreyfus family of mutual funds, as well as institutions such as pension funds and endowments.

More Work

Brooks said that the typical trader has a lot more responsibility. His answer to juggling all of the many tasks is to use technology effectively to automate a larger proportion of the workflow.

One solution is order management systems. These are essentially the central nervous system of many buyside trading (as well as sellside) desks.

The Boston Company recently switched its order management system (OMS) from Landmark to Eze Castle.

"The Eze Castle system gives us a much better platform to control all of the applications that we need in a very high, technological environment," Brooks said. "It provides us with a very robust, electronic routing capability - through both fixed and proprietary routing networks."

He added, "We are able to receive indications of interest directly through the OMS. We also have ECN functionality directly integrated into the system."

Brooks is obviously pleased with his OMS supplier.

"A lot of other OMS vendors want to own all the technology involved with the order management system," he said.