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May 31, 2004

Banc of America Takes the Electronic Train

By Peter Chapman

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  • Banc of America Takes the Electronic Train
  • Page 2

'Low Touch' and 'No Touch'

Banc of America Securities, as part of a fast-growing trend among full-service brokers, has launched an electronic trading desk.

The mid-sized investment bank has combined its direct market access and algorithmic trading services under the newly-formed Electronic Trading Services (ETS) group. The goal is to offer institutional customers low-touch' and no-touch' computer-driven executions.

"ETS is a software company inside of a broker," said Rob Flatley, who is in charge of marketing, support and strategic alliances for the new division. "We design, plan and innovate software ideas. We acquire software

companies. We support the software. And, of course, we offer execution services from that platform."

If ETS is a software company, then Flatley's hire was a natural. The exec joined BofA in February from Macgregor, the buyside order management systems vendor, where he was chief operating officer. "They needed someone who knew how to run a software company," Flatley says.

At the same time, vendors such as Macgregor aren't so different from brokerages anymore anyway. Macgregor operates a brokerage subsidiary called Blackwatch partly to charge its buyside customers fees on routed orders. Such revenues account for a significant portion of Macgregor's total sales, according to Flatley.

BofA's ETS is one of only a handful of such operations on the Street, but their numbers are growing. The leaders include Credit Suisse First Boston (CSFB), Morgan Stanley and Goldman Sachs. J.P. Morgan recently established a desk. Bear Stearns and Lehman Brothers are said to be scouting for staff.

By and large, all are imitating Investment Technology Group (ITG). The specialty brokerage pioneered direct access and algorithmic trading in the early '90s. It is now ranked fourth, by some accounts, in terms of algorithmically-traded shares, behind CSFB, Morgan Stanley and Goldman, respectively. CSFB's AES desk reportedly processes about 80 million shares per day.

The move to computers by the full-service players was borne of the recent down market. That's when large money managers began to scrutinize their transaction costs in earnest and prune their rosters of brokers.

Now, to retain their customers and protect their margins, the bigger broker dealers are investing heavily in electronic trading platforms, cutting staff and promoting cheap computerized trades.

CSFB turned to its prop and program traders to build an algorithm desk. Goldman tapped the resources of its Hull Trading and Spear, Leeds & Kellogg acquisitions to build out its offering. (On the margin front, Goldman also fired 55 traders recently.)

The bank's overall plan is to offer money managers a range of execution choices: from high-touch to low-touch to no-touch. High-touch trades are those difficult, relatively large trades that require human oversight. Here the broker can charge the highest commission, which now averages about five cents per share.

Liquid Markets

Low-touch and no-touch trades are those trades easily accomplished by computers in relatively liquid markets. Commissions are in the two-cent range. Low-touch trades involve the sellside trader's help. No-touch trades are do-it-yourself low-touch trades. BofA charges its customers the same rate for both low- and no-touch trades.