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February 1, 2005

The New Sales Trader

By Anthony Conroy

Block trading volume, as traditionally defined, has dropped off precipitously in the past four years. Indeed, at the New York Stock Exchange it showed no signs recently of a comeback. Block trading accounted for 31 percent of published NYSE volume for December, below the 2004 average and the same total as last July. However, this is not a bad sign for the sales trading desk. In fact, the best sales traders are winning over clients who trust they can take a large order and profitably slice it up and obtain best execution - at an acceptable risk level. Sales traders today may not feel like masters of the universe. But as masters of liquidity, they can thrive.

There's no question that fewer trades are now executed as blocks. According to the NYSE, which defines a block as 10,000+ shares, block trading as a percentage of total volume was never lower than 48.7 percent any year from 1985 until 2001. That's when it dropped to 48.1 percent. By 2003, blocks accounted for just 37 percent of volume, and by May '04 for just 29 percent. Since then, the monthly tally has never risen above 31 percent.

What's happened? Decimalization has significantly impacted spreads, reducing the incentives for principal trading and, therefore, driving the buyside to seek an agency trading model. Crossing networks are absorbing a growing share of large order flow. New technologies have empowered buyside traders.

Does this mean the sellside block trading desk is endangered? Hardly. Buyside traders may be more empowered, but they are also subject to increased accountability. For instance, clients are asking for performance measurement and supervisors are constantly evaluating each individual's results. Therefore, the buyside trader who handles the bulk of his orders directly is also likely to place a premium on the sales trader.

The buyside still needs to move large blocks of stock. But the role of the sales trader has not stood still. He's no longer an order-taker. When events roil the markets, or a large block needs to be sold under less-than-ideal circumstances, the sales trader should be ready. That means mastering every tool, including a full array of trading algorithms, multiple crossing networks, and state-of-the-art technology. It means close communication with floor brokers and a dynamic sales trading desk.

A peek at block trading statistics might leave the impression that the sellside block trading desk is history. On the contrary, while today's sales traders are helping to drive the statistical decline of block trading, block orders are still coming in. However, they are not leaving as blocks. They are being sliced through the market - not simply by the mechanical agency of algorithmic trading, but under the control of human experts. These are making simultaneous use of every tool the market offers for accessing liquidity.

It's not enough to be a top-flight executor of trades. Today's sales trader must be a master of multiple disciplines - expert not only in finding liquidity, but in interpreting market data. Access to liquidity and top technology puts his finger on the market's pulse. The sales trader who can leverage this with a broad understanding of all forces that move markets - currencies, derivatives, convertible bonds, commodities - can serve clients as a kind of on-field economist.

The trader must match his sense of where the market's headed with a keen understanding of each client's trading strategy - and then proactively pick up the phone to suggest a trade that should help promote that strategy. For example, if he knows a client is looking for an opportunity to buy auto industry stocks, a sudden movement in the currency markets might prompt a call to suggest that now is the time. Developing credibility, as a source of trading ideas, increases the liquidity at the sales trader's disposal. He becomes a crossing network unto himself.

The advent of advanced technology does not eliminate the need for human agency. When trades are executed faster and market participants have access to more liquidity sources, the expert who can read the market's movements becomes more valuable. He can deliver intelligence to buyers and sellers, and bring them together to their mutual benefit.

Anthony Conroy is managing director and head trader at BNY Brokerage.