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June 30, 2004

From the Street to ECNs

By Nina Mehta

Todd Ehret has traded high-yield, value, tech and biotech stocks.

His latest focus is a volatile and challenging universe: small-cap and mid-cap technology stocks.

Ehret is the head technology trader in the hedge funds group at Robeco USA, a division of Robeco Group, one of the largest asset managers in Europe. Ehret trades for one market-neutral hedge fund and a long-biased hedge fund. He writes 50-75 tickets a day. Still, he often can't buy an entire position outright since the small-cap and mid-cap stocks he trades aren't liquid enough. "I may be buying or selling the same name day in and day out for weeks on end in order to build a position," he says.

Robeco Group, a subsidiary of Rabobank, manages $135 billion worldwide. The hedge fund unit that Ehret trades for in New York City, manages more than $1 billion. Before joining Robeco in June 2003, Ehret was at Eos Partners, another hedge fund based in the Big Apple. On the day of this interview, Ehret bought 25,000 shares of a stock that traded 31,000 shares for the session. Ehret essentially accounted for the volume. "I bought it carefully and at the price I wanted it at," he says. "I'm not going to chase a stock up because somebody buys it stupid or sloppily." Over the previous month, he had accumulated 300,000 shares of the stock. He still had more to buy.

The short positions held by Robeco's funds tend to be in larger, more liquid names and have a more short-term orientation. "The portfolio managers tend to look for a catalyst or event on the calendar near-term," Ehret says.

Ehret now trades less with the Street and more on ECNs. "I can probe the depth in Archipelago, Brut, INET - all the ECNs - almost at the same time," he says. "I do it virtually instantly without showing my hand. And I don't have to be on the phone with five different market makers worrying about whether a market maker is trying to pick me off, or whether somebody at a brokerage firm is showing my order to the world." Ehret says he gets 'pennied' on the machines, but that the price improvement has been dramatic. Before decimalization, he would sometimes pay up 3/8th of a point, or a stock would run up 5/8th of a point before he was done. "That's 38, or 62, cents," he says. "Now a stock moves 13 or 14 cents and you sometimes get frustrated. But in reality that's only an eighth of a point."

Robeco uses an order-routing system, ROX, designed by Lek Securities, to gain access to a number of marketplaces. In a typical trade, Ehret tries Archipelago Exchange first, since it has a "nice feature" that allows him to display a few hundred shares and put tens of thousands behind the order, he says. It also refreshes itself continuously. INET, however, is more active pre-market and after-market, Ehret notes. So on these occasions, he opts for INET.

Ehret uses brokers in limited situations. He will go to the sellside when he sees brokers advertising on AutEx, or on another system that they are a buyer or seller in a name. Ehret also uses brokers "in size situations." For instance, he will use the sellside, "when a broker calls and says they're a holder of a name, or that they're in touch with a size position."

A portfolio manager at Robeco, for example, may have heard from a company that a former director or a large shareholder is selling stock. He may have learned that there are, say, one million shares for sale through a broker. "I bought stock today that a company was selling for some employees," Ehret says. "It was option-related selling, about 180,000 shares. I ended up buying two-thirds of it." In those cases, he noted, he must go to a Street broker since the broker is representing the other side.