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June 30, 2004

Electronic Trading Takes A Hold of Buyside Desks

By Peter Chapman

Buyside desks are stepping up their use of electronic trading services.

Trading through ECNs, direct market access, crossing networks and algorithmic servers by the buyside is on the rise, according to a new study by the Tabb Group. Traders still value their human brokerage arrangements, but are pressing for more electronic trading.

"The U.S. equity markets are facing unparalleled change," said Larry Tabb, chief executive of the Tabb Group. "The sheer amount of change stemming from the 1997 SEC Equity Order Handling Rule, underpinned by massive technology improvements, has been mind boggling, earth shaking." Tabb spent two months interviewing 52 traders at institutions managing assets of between $10 billion and $1.1 trillion. About 90 percent of the traders have connectivity to at least one ECN; many use direct market access technology to trade on ECNs. The reasons cited for using ECNs include lower market impact, greater control over their executions and lower trading costs. Most buyside desks (70 percent) also use crossing networks, Tabb found.

Algorithmic trading is the newest category of electronic trading. The technology is used by six out of ten firms. Among the larger desks, though, the ratio is eight out of ten shops. Clearly, many desks are grappling with when to use the technology. Nearly 60 percent say they are "still in the experimentation phase."