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June 30, 2002

Riskless Principal At Salomon

By Editorial Staff

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Dave Weisberger wants to make it clear: Nasdaq trades done on a riskless principal basis are superior to those done on an agency basis.

That bit of wisdom from the Salomon Smith Barney managing director in charge of trading systems may be fightin' words for some of the big broker's competitors. But it represents Salomon's interpretation of the new rules of Nasdaq trading. It was also the starting point of an effort to improve its market making technology

Weisberger began the project earlier this year. His team retooled Salomon's front-end and order management system so that the Nasdaq desk could effect trades on a riskless principal basis.

The job was just the latest Weisberger has undertaken since 1999 in support of Salomon's market makers. That year he was picked to lead the development of GATE, or Global Advanced Trading Engine, Salomon's next generation Nasdaq trading system. GATE has automated much of the small-order work on the desk and given traders new tools to efficiently execute block orders.

Weisberger, in charge of Salomon's non-dollar program desk when he was picked for the GATE job, was that rare trader: one with a background in technology. In addition to spending eight years in sales and trading, he had seven years of systems development under his belt.

He joined Salomon in 1995 after spending 11 years with Morgan Stanley, both in New York where he developed that firm's worldwide program trading systems and in London where he traded customer programs. Weisberger also manages Salomon's quantitative equity trading department. He discussed his latest project with Traders Magazine technology editor, Peter Chapman.

Traders: Salomon Smith Barney is recommending riskless principal trades over agency trades to its customers in the Nasdaq market. Why?

Weisberger: Riskless principal delivers all the benefits without the restrictions. As with agency-based transactions there is transparency. The customers can see every print if they want. They can do their time and sales analysis. Also, all of the agency-like transactions are soft dollar eligible. Unlike agency trades, however, you don't have to ignore sources of liquidity. You can access a market maker's pre-existing positions or tap into other sources of liquidity on the floor such as positions from our portfolio and convertibles desks in the same transaction. The part of the trades which come from principal accounts are not soft dollar eligible, but the system can distinguish that after the fact without losing the convenience of a single settlement.

Traders: What are the minuses of agency trades?

Weisberger: Agency trading does not allow for the provision of liquidity at all. A pure agency trade cannot be stopped out or completed on a principal basis. As a result, if you want to provide these services in an agency system, transactions must go through two different accounts.

Traders: How have your customers reacted?

Weisberger: The vast majority understand. They are comfortable with the way we're doing it. However, there is an ongoing education process to explain that proper "riskless principal" trades provide the same protection to the client as agency trading.

Traders: Are you doing any agency trades?

Weisberger: We're doing a fair amount of agency cross trading, but our trading in the market is almost exclusively riskless principal.