Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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July 31, 2003

Many Styles in Beantown

By Nina Mehta

Chris Rice must be cut from the right cloth.

An investment manager depends on skilled traders just like Rice, especially when its assets under management have grown in leaps and bounds. Indeed, when Rice joined State Street Global Advisors in 1996, the Boston-based investment manager had about $170 billion in assets under management. At the end of May this year, the assets had grown to $796 billion. And Rice, who heads the 10-person Boston trading desk, watched the operation expand. His desk now trades equities, equity derivatives and currencies. SSgA also has a Hong Kong and London desk.

The firm's funds cover a range of styles and market caps. Of the six equity traders in Boston, one handles index trading, three trade for active funds, and the remaining two execute trades for affiliated companies or businesses. Rice and a colleague trade equity derivatives. Two others manage the currency book.

"For the passive business we have lots of dialogue with portfolio managers over the trading strategy around index changes," Rice says. "With active managers we talk more about where we should be buying stocks relative to where the market is."

The active traders on Rice's desk are organized by markets. One focuses on Nasdaq stocks, one on New York Stock Exchange listed stocks, and another is responsible for Canada, Latin America and ADRs. The reason the desk is organized this way, says Rice, is that there are specific market-structure issues - such as different closing mechanisms in different markets - that affect a trader's execution strategy.

In Canada, for example, the last print is the close. That means it is difficult for indexers to achieve an arbitrary price point. But on the NYSE, specialists come up with a clearing price.

The desk's biggest trade every year is the Russell rebalance. "We work among ourselves and with counterparties to understand who has the appropriate infrastructure to be able to handle a trade of this size and who can deal with the operational considerations of processing part or all of more than 10,000 tickets," says Rice.

It's important for indexers to read the market. But it is more important, when designing a trading strategy around an index event, to know who has the supply side, according to Rice.

"With a classic index change, where an index add goes up and an index delete goes down, we have to get an idea of where we see these different spreads trading because ultimately that determines how we execute," says Rice.

In recent years, changes in market structure have reduced the depth of liquidity in the market. Unsurprisingly perhaps, State Street Global Advisors has become an aggressive user of direct access products like Archipelago ECN and Instinet's Newport, which allow traders to interact directly with the market.

Nevertheless, traditional broker dealer relationships remain important sources of liquidity, especially for more difficult order flow. That includes less liquid, lower-market-cap stocks.

Rice sees two ways to help traders execute orders more efficiently. First, the desk is working to develop pre-trade cost estimates for trades. Whether an order is executed via direct access or traditional broker dealer, "we want to see that what we think it will cost turns out to be what it actually costs," he says.

Another way to lower transaction costs is by using rules-based trading for certain segments of order flow, says Rice. "In this case, an algorithm automatically trades a portion of a trader's order flow, based on the characteristics of the order flow and the strategy-active, passive or enhanced," Rice explains. This is usually done on more liquid names.