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January 1, 2002

The Relaunch Of Harborside: Going Toe to Toe With Liquidnet

By Peter Chapman

The presence of a harbormaster is central to Harborside+'s argument that it offers the superior service. "Verbal trading, which is what they are used to, is much easier to implement than onscreen negotiation," said chief executive Bob Hall. "It better incorporates the nuances of trading."

That philosophy is grounded in the reality that Harborside+ customers are only on the hook for 25,000 shares. Although their IOIs do not reference size, Harborside+'s rules require them to trade at least 25,000 shares at the mid-point of the best bid and offer when their IOIs match. But, since traders are likely to want to move hundreds of thousands of shares, a human middleman adds value to a potentially awkward negotiation, according to Hall, "especially when finding your common [trading] level."

At least one buyside trader agrees. "An intermediary can certainly be helpful to the process," said Andy Brooks, head trader at T. Rowe Price. "There are times when [the buyside trader] needs to be comforted. The sales trading function, if done well, is critically important."

Hall says text chat negotiation has risks. An anonymous trader could vanish after gleaning his counterparty's intent. "We believe there is a free peak in Liquidnet," he said. "You can choose not to negotiate."

Be that as it may, it is Liquidnet, which did not debut until April 2001, that is the success. Harborside squandered a year and a half of first mover advantage. What happened?

Hall offers three reasons. Firstly, @Harborside was not considered an independent organization. It was viewed as an extension of Jefferies' trading desk. "People said: If I want to call the Jefferies desk, I'll call the Jefferies desk,'" Hall said.

Some on the buyside were concerned how confidential their information was in the hands of a Jefferies' account executive. Others wanted to use a system that allowed them to direct all or a portion of their commissions to another broker if they chose. That way they could pay off their obligations for research, etc. Jefferies did not allow that.

Secondly, Hall says, Jefferies did not put enough marketing muscle behind the product. It was assumed that Jefferies account executives would push @Harborside, but, in practice, the burden of publicizing the product fell to one man: creator Holway.

Scant publicity meant no critical mass of IOIs. A few traders would use the system one week, fail to match, and then give up. The same would happen the following week. Devoid of a large group of traders all inputting IOIs at the same time, liquidity never built.

Thirdly, @Harborside was difficult to access. "The only way to get into it was via a clunky web interface," Hall said. While Jefferies had agreements to integrate into various order management systems, they were never implemented.

Pulls Plug

@Harborside's failure was complete by the summer of 2000. Jefferies pulled the plug and Holway told traders not to use it. Then came the knight in shining armor.

Thomson Financial, owner of AutEx, the original electronic IOI mechanism over 30 years ago, saw potential. It created a partnership with Jefferies and a few individual investors, forming an independent broker dealer, Harborside+ LLC. It then installed one of its own as CEO.