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February 1, 2002

Captive Order Flow Is Dead, Exec Says

By Peter Chapman

Broker dealers are staking out their positions in the wake of new disclosure rules from the Securities and Exchange Commission. "The game begins today," Sean McHugh, a vice president of equity compliance at Goldman Sachs, told attendees at a best execution conference in Chicago hosted by data analysis firm Market Systems. "That's what we've told our market centers. There's no such thing as captive order flow anymore."

Goldman now makes its order routing decisions based on new execution quality statistics supplied by market centers under Rule 11Ac1-5. It does so partly because it must comply with sister rule 11Ac1-6 and inform its retail customers of order destinations. Market centers, in turn, are scrambling to position themselves in the new environment. "We explain our [11Ac1-5] statistics in a way that illustrates our comparative advantage," said Paul Wigdor, Pershing Trading Company's general counsel. Pershing said it advises customers to focus on their own execution data rather than the aggregate figures.

Pershing is also trumpeting the superiority of its reported numbers over those of a chief rival, the New York Stock Exchange. Pershing's specialists at the Boston and Cincinnati stock exchanges boast their executions occur at effective spreads' - a key metric - slimmer than those on the Big Board. The Big Board is also telling customers to focus on their own execution data rather than the aggregate numbers. Paul Bennett, the exchange's chief economist, cautioned: "There's more to best execution than just these numbers."