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February 1, 2002

Breaking Down Walls

By Tom Taulli

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Traders at Nicholas-Applegate, an active investor, have a striking view of the Pacific Ocean, a view as open as their contact with the firm's portfolio managers and analysts.

The firm's eight traders, three assistants, its 30 PMs and 32 analysts, share the same open space on the 29th floor of Nicholas-Applegate's San Diego offices. There are no walls separating them.

"We have a good relationship," said Jamie Atwell, head of domestic trading for the independent investment advisory firm, which has $25.8 billion in mostly equity assets under management.

"I think it's funny when I call a trader at another firm," Atwell added. "He'll get back to me later because he had to leave voice mail with the PM." Not at Nicholas-Applegate.

Decision Makers

Atwell said the PMs have a strong appreciation of the trader's role at Nicholas-Applegate. "They give us lots of discretion in terms of placing trades," he said. "We are decision makers and not mere order takers. We'll look at the charts, read the news and place trades. In fact, we are the eyes and ears' of the PMs. We become a pipeline for crucial information for the PMs."

That open-minded approach is evident elsewhere. Since Atwell came on board in 1997 from AIM Capital Management, there have been no departures from the desks, he said. The average trader tenure is eight years. "This makes my job easier," he said. "The key to best execution is the knowledge of our traders and their relationships in the business."

"It can't be done overnight," he added. "We deal with 150 brokers and ECNs."

Another key to providing its clients the best results is Nicholas-Applegate's use of limit orders. Atwell says his desk does not place many limit orders because, as an active investor, limit orders could result in losses of hundreds of basis points.

Atwell had this example: Let's say a PM places an order to buy one million shares of ABC, because of some catalyst, such as fundamental or technical news. The stock is currently selling at $20. The PM does not want to buy any shares above $22.

So, the trader goes into the market and buys 500,000 shares at, or below $22. Then the stock keeps rising so that it is not possible for the trader to buy more shares.

"The stock does not go back below $22 and instead, in the next few months, it goes to $60," Atwell explained. "You've left a lot of money on the table by keeping 500,000 shares out of the stock."

"If you do a lot of limit orders, you will run into this problem," he added. "Our philosophy is that the first one in is the one who wins. We do not want to miss a big trade because of a few pennies on a limit order that prevents us from buying more shares."

Atwell became interested in investing from his grandfather. "I guess I was born to trade," he said.