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January 1, 2004

Looking for New Liquidity

By Nina Mehta

ECNs are an increasingly valuable tool for Nasdaq stocks, but they are just one part of the "liquidity spectrum," according to Corey Geog. He is one of two domestic traders at State Teachers Retirement System of Ohio. And he's a strong believer in technology on the trading desk. STRS of Ohio, one of the largest U.S. pension funds, has about $50 billion in assets. The fund serves more than 400,000 teachers.

On technology, Geog says the key is using it to access liquidity in different venues. He notes that STRS of Ohio routes the vast majority of orders on its domestic desk electronically. "We want traders to spend their time analyzing the market and making trading decisions as opposed to doing data entry," Geog said.

The pension fund uses the Macgregor order management system. When orders come into the OMS, they can be launched into a broker-neutral platform such as Bloomberg's List Manager or Instinet's Newport. The benefit is that the traders can see dynamically how well a trade is doing, versus immediate execution and the volume-weighted average price, while they're in the market. These platforms allow traders to route brokerage orders electronically as well. "Whether I send an order to Bear Stearns, Cantor Fitzgerald or an ECN, or use multiple places for one order, everything stays on the platform," said Geog. "At all times my order is visually on one screen but I can trade electronically with whichever broker I choose," he added.

An important side of the technology equation is the STRS IT department, adds Geog. After all, it's the computer staff's support of the trading desk that enables traders to make more dynamic decisions.

Approximately 90 percent of STRS' domestic portfolios are managed internally. The pension fund recently switched its universe of stocks from the Standard & Poor's 1500 to the Russell 3000. Geog and his trading desk colleague on domestic stocks trade across the pension fund's various portfolios.

Geog uses ECNs and capital from brokers. STRS of Ohio divides its broker commissions among research allocations, trading allocations and soft-dollar allocations. "The portfolio managers want at least 70 percent of our commission dollars outside soft dollars to be paid to research brokers," Geog said. On occasion, he uses third-market brokers and steps out' the business to research brokers to pay the bill.

Geog notes that trading Nasdaq stocks remains easier than trading listed stocks: "There's a faster pace and intraday you can get more done." At the New York Stock Exchange, on the other hand, the process is more drawn out. That's because of delays by the specialist system, Geog contends.

The big problem with the NYSE is pennying,' he says. With traders less apt to put big blocks of stock on a specialist's book, the average-share size of executed orders has decreased and program trading has increased. Geog would like to see a return to nickel increments, or changes in the trade through rule. "We should have access to stock three to four pennies above and below the current quoted market without getting held up by the specialist," he said. "That would allow us to get something real done, and not just a few hundred shares."

The NYSE has responded to the demands of institutional investors with LiquidityQuote and Institutional Xpress. Geog finds these facilities helpful, but says that the situations in which he can use them are "limited." Orders must be at least 15,000 shares and have been on a specialist's book for 15 seconds. For some stocks, he notes, 5,000 or 10,000 shares is a meaningful size. He hopes the NYSE will lower the minimum order size and the time the order has to be on a specialist's book.