Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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September 30, 2002

Friends and Adversaries

By Tom Taulli

Ken Zimmer is a former sellside sales trader who does not mince his words.

"I like to get on my soap box on certain issues," said Zimmer, who's now a buyside trader at Frontier Capital Management. The sellside, he stressed, is his customer, not his adversary.

Heresy? Not to this buysider.

"It's a critical distinction and can be very helpful for the buyside trader," explained Zimmer, who previously worked on the sellside at Merrill Lynch and Hoenig & Co.

Frontier is a Boston-based investment management firm - part of Affiliated Managers Group - that has about $5 billion under management. For Zimmer, one of the many attractions is the diverse product base of the firm. The firm has funds that range from balanced, capital appreciation, growth, long-short, small cap and large cap.

The Team

Zimmer is part of a team of three traders. On average, the trading desk executes 75 trades daily.

A critical aspect is the firm's research. "We try to get research any where we can," Zimmer said. "It is hard to get good research. But with the recent scandals, I think research will start to improve. With the new regulatory focus, analysts are likely to become more probing and creative in their reports."

A big advantage of being a small desk like Frontier is the interaction between the portfolio managers and the traders. "We have constant contact with the PMs," Zimmer said. "They are part of nearly every trade."

Of course, it helps that Zimmer was on the sellside. "I think the conflicts and frustrations result from the fact that the buyside does not understand what is happening on the other end of the transaction," he said.

Zimmer compared service at large and small firms. "While you can expect custom service from a small firm," he said, "do not expect it from a big firm. It's just a matter of the resources and limitations of the types of firms. Do not expect lots of liquidity from a small firm but you can expect it from a big firm. These are simple ideas, but they are extremely important ideas. Of course, I really think most in this business are doing the best they can."

Zimmer is enthusiastic about continuing education. True, having street-smarts is important but a buyside trader needs to have a strong understanding of the markets. In fact, Zimmer recently got his Certified Financial Analyst (CFA) designation, which takes three years.

"The better a buyside trader can be in terms of filtering information, the better the executions," Zimmer said.

ECN Trades

About 65 percent of Frontier's trades are on Nasdaq. For Zimmer, that means dealing regularly with ECNs. Zimmer thinks ECNs and ATSs are the wave of the future.

"I'm a big fan of Liquidnet, which allows trades to occur between institutions," Zimmer said. "For the most part, ECNs are very cumbersome to use. I'm amazed at how much volume goes through these systems because of the difficulties. If the ECNs could be made more convenient, I'm sure usage would be much higher."

Another challenge is decimalization. "It is a development that you can make arguments for on either side," Zimmer said. "It has definitely meant that spreads have narrowed, which is good. It has also meant that liquidity has become hidden. Traders do not want to put up limit orders to call their hand."

Still, Zimmer enjoys the challenge. "I really love understanding the way things work," he said.