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January 1, 2002

The Relaunch Of Harborside: Going Toe to Toe With Liquidnet

By Peter Chapman

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If at first you don't succeed, try, try again. Of course, it may be even harder the second time around. Jefferies & Co. will soon find out as it re-launches its @Harborside block trading service this month.

Now called Harborside+, the service still promises to bring buyers and sellers together anonymously, but this time its owners are spending more dollars to back up their claims. And those owners are not just Jefferies anymore. Thomson Financial, the catalyst in @Harborside's rebirth, has a significant stake. Several individual investors are also partners.

(Thomson Financial is the parent company of Thomson/ IMG, publisher of Traders Magazine.)

Harborside+ is no longer merely an appendage to the Jefferies empire. It is an independent broker dealer with a staff of ten and a chief executive with nearly 30 years experience in financial services.

It's comes a long way, from its first incarnation between May 1999 and August 2000 when @Harborside was a seat-of-the-pants operation run by creator Richard Holway.

Harborside+'s relative independence is expected to draw those traders who were leery of using a system aligned with a single broker. Other changes include a more muscular liquidity-gathering effort, usage by the sellside, and new technology.

But while these internal changes sound good, they may not be enough because the competition is more intense today than when @Harborside began. When @Harborside debuted, Liquidnet did not exist. Now, Liquidnet, a similar block matching service, is embedded in the workflows of several influential buyside desks. After 10 months of existence, Liquidnet is trading four million shares per day. But Harborside+ executives claim to have built a better mousetrap. (Some pros regard the Liquidnet volume as modest but others say it a success.)

Both Liquidnet and Harborside+ claim to solve the buyside trader's biggest gripe: that the structure of the U.S. stock market does not permit a pro to trade large blocks without adversely affecting the stock's price. Orders must be broken up into several smaller lots so as to pass quietly through the system. Otherwise the noise' that builds on the Street as sales traders shop blocks on the telephone will cause the price to move.

The solution, according to both vendors, is to eliminate the telephone calls. Rather than call a broker, who may then call dozens of his accounts, a buyside trader should input an indication of interest' into the system. The IOI is simply an e-mail message that includes the name of the stock and the side of the market - buy or sell - on which the trader lies. It does not include price or size.

Harborside+ requires the trader to type the IOI himself. Liquidnet, on the other hand, grabs' all the orders on the trader's blotter and converts them into IOIs. In both cases, however, all information is kept confidential until there is a match.

Once the system detects both a buyer and a seller of the same stock, it will alert the necessary parties. Then a negotiation process ensues. With Harborside+, a harbormaster,' or sales trader, negotiates the transaction with the buyer and the seller over the telephone. With Liquidnet, the buyside trader enters into a text chat session with his potential counterparty.

Executions are usually printed on the third market.

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