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September 30, 2002

The Kissin' Cousins of Clearance and Settlement

By Peter Chapman

With its acquisition of B-Trade Services this February the Bank of New York brought together two kissin' cousins for the first time.

G-Trade Services and B-Trade Services both provide execution, clearing and settlement for Bloomberg Tradebook, the agency brokerage division of the market data giant. G-Trade handles the foreign orders and B-Trade the domestic.

But until earlier this year they were owned by different organizations and operated on opposite sides of the world. B-Trade was part of BNY ESI and G-Trade was part of CLSA, a Hong Kong brokerage. Now they are both in New York as part of BNY Securities.

B-Trade was formed in 1995 by ESI to accommodate Bloomberg's ECN ambitions. The data distributor wanted to offer its thousands of terminal users electronic matching of Nasdaq stocks, but did not want to become a full-fledged stock brokerage. It asked ESI to fulfill that role.

By and large the relationship between Bloomberg and B-Trade is the same as a small brokerage and a big clearing firm. Bloomberg brings in the customers. B-Trade processes the trades.

"We act as a dual agent on behalf of the buyer or seller for trades matched within the Tradebook system," explained Greg Brennan, B-Trade's president.

In other words, if a match occurs on Tradebook, B-Trade buys from the seller and sells to the buyer. Legally, two buyside firms cannot trade with each other. B-Trade also vets potential customers' creditworthiness; runs a service desk; and clears and settles.

It does not handle the routing of unmatched Nasdaq orders, but does route listed orders to the floor of the New York. It will establish a link to the Intermarket Trading System sometime this quarter as Bloomberg rolls out an upstairs listed book. "We're joined at the hip," jokes Brennan.

G-Trade was formed in 1999 by G-Port, the cross-border basket trading division of CLSA. A single-purpose brokerage, G-Trade's charter was to accommodate Bloomberg's international direct access ambitions.

G-Trade executes and clears in 24 electronic markets around the world 24-hours a day. It does no business in the U.S.

"Our day opens in New Zealand and ends in Canada," said Jonathan Slone, G-Trade's president.

Outside the U.S., Slone claims, G-Trade's volume accounts for half of global turnover. That comes to about $1 billion per day. On a recent day in August, B-Trade handled 97 million shares.

Over half its customers are European. The rest are in Asia and the U.S. "We tend to be mostly a cross-border network," Slone said. "Europeans are natural cross-border traders."

Customers are hedge funds, index arbitrageurs, traditional money managers, broker dealers and banks.