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February 1, 2002

Hedge Funds on Board

By Brian O'Connell

While direct access vendors such as Blackwood Trading, Townsend Analytics, and ProTrader siphon off some of the big market makers' share of the trade execution business, others have had more luck attracting hedge funds. Several direct-access players have seen triple-digit growth in their hedge fund customer base, according to Jay McEntire, chief executive of ProTrader.

"We're a prime example," McEntire said. "Since early 2001, when we started going after institutional business, our hedge fund customer base has grown from 12 to 117 clients."

Why the big interest? McEntire says that hedge fund managers want direct access to multiple markets, smart order-routing capabilities, rapid trade executions and lower transaction costs than what traditional broker dealers are paid. Another contributing factor is the direct-access industry's significant share of Nasdaq trading volume. (See main story.)

The majority of the 6,000 to 8,000 U.S. hedge funds still use the phone or e-mail to contact their brokers to manually execute trades, McEntire notes. "There's a big untapped market for direct access providers and we're devoting most of our buyside marketing budget to small hedge funds," he said.

ProTrader is not alone. Terra Nova, a direct-access broker that uses Townsend Analytics' RealTick system, launched a separate institutional division in an effort to persuade hedge funds and investment advisers to use RealTick. But it's ProTrader that's leading the charge toward the hedge fund industry. Last fall, the firm was acquired by Instinet Group for $150 million in cash and stock, giving it a significant chance to develop.

Instinet executives say the acquisition should improve its customer interface and order routing technology, but it also extends Instinet's reach into the hedge fund and institutional markets.

"We want to customize our service offerings to our institutional clients in the U.S.," said Doug Atkin, chief executive of Instinet Group. McEntire says that Instinet supports ProTrader's strategy of targeting actively traded hedge fund portfolios with less than $100 million under management.