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November 1, 2002

The Wide World Of Trading: Next Step Is Global Execution System

By Desmond MacRae

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  • The Wide World Of Trading: Next Step Is Global Execution System

Auerbach Grayson, a New York-based brokerage with international business, is surviving a global bear market nicely, according to trading pros.

The reason for this success may be an unusual business model. "We do not have branches," said David Grayson who joined Jonathan Auerbach as co-partner shortly after the firm was founded. "We have roots."

Auerbach Grayson has a small staff of 35. But it has correspondent relationships with a worldwide network of brokerages. In Nelson's Investment Research Survey for 2002, Auerbach Grayson was ranked number 10 in the total number of companies covered, and number six for the total number of equity analysts employed in this network.

"They have a fantastic, creative business model that has worked for years," said Brendan Woods, who heads an independent global transaction and investment firm in Toronto. "The business model has worked consistently right through the whole last decade regardless of market conditions," he added.

With a new office in Serbia, Auerbach now has a network of 84 brokerages, which includes the hub office in New York.

The Belgrade-based brokerage firm, Senzal A.D., provides research reports to U.S. investors and other customers in Auerbach's global network. It also provides a platform to buy and sell - in this case - Serbian securities through Auerbach in New York. That's also typical of what other network members offer.

"In the early 1990's, David and I were both CEOs of New York Stock Exchange firms," Jonathan Auerbach told Traders Magazine. "We were also on a committee of member firms that did non-traditional business."

With institutional U.S. overseas investing then heating up, Auerbach said he believed these institutional investors were not getting enough local input. "The best sources of the three important components for global investing - ideas, best executions, and flow - came, and still comes, from local firms," he said.

Auerbach saw an opportunity in SEC Rule 15(a)6. This rule prevents unregistered foreign brokers from soliciting business in the U.S. These are mostly small firms. But they can distribute their research through a U.S. broker. For that reason, they might want to team up with Auerbach. Non-U.S. brokers that Auerbach knew agreed there was room for more local support, but his partners at the time didn't. "We parted without rancor," he said. "I set up the firm, and David soon joined as a co-partner."

Today, Auerbach himself manages trading and the trading relationships in the network - a network that both expect will expand to some 100 countries in the next few years.

Grayson recruits new brokerage firms, never more than one per country, and he oversees operations. Customers can private label' their Auerbach connection, which many do. "We are the New York office for our network members," Grayson said, "offering brokerage and local research from in-place analysts to any one of the other 83 countries."

Both executives call on asset managers, pension funds, mutual funds and brokerage houses. They won't name their customers because most institutions value anonymity, especially when dealing in emerging markets. Volume is equally divided between established and emerging markets.