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April 21, 2005

Hedge Funds

By Editorial Staff

*The hedge fund business is booming at investment banks and most revenues come through sales and trading. So says a new report from Credit Suisse First Boston's London branch, which reported the banks last year raked in $25 billion from hedge funds. CSFB said about 75 percent came from sales and trading. The rest came from such core prime brokerage offerings as stock and margin lending. In the U.S., the banks that did best were Goldman Sachs and Morgan Stanley. Bear Stearns took third place.

All told, 77 percent of hedge fund assets are located in the U.S. Another 18 percent are in Europe while the rest are in Asia. Trading - and not assets under management - is the best indicator of hedge funds' importance to banks, CSFB said. Hedge funds account for between 40 percent and 50 percent of turnover on both the New York and London stock exchanges, according to CSFB.

Trade Through

*Rep. Richard Baker (R-La), a fierce critic of the trade-through rule, "informally" asked the SEC to move slowly on the controversial Reg NMS plan, just as it was about to be considered for approval by the agency. Baker, the chairman of a key House subcommittee, previously called the NMS proposal "the worst public policy." However, SEC Chairman William Donaldson, who is regarded as the deciding vote on the five-person commission, had said he wants no delay in passing the NMS package. Still, Baker, at a public hearing, had warned that, if the package did pass, he might offer legislation that would reverse the SEC's action. Baker's comments came at the same time as representatives of several electronic trading firms said an extension of the trade-through rule would be disastrous.


*Where will the opportunities come from in the next five years for the outsourcing of various securities functions? They will come from small asset managers, second and third-tier financial institutions and direct market access services. That's according to a report on outsourcing by Mercer Oliver Wyman. "Direct market access currently generates $3 billion to $4 billion for the broker dealers, but their business is at or below cost. Integrated execution and clearing/custody providers are in a good position to capture this market with a low-cost operating model," the report says. Mercer Oliver Wyman also says that outsourcing will "not appeal to the large, sophisticated asset managers who will achieve efficiency."

Electronic Cross

*Nasdaq's electronic cross performs better at the close than the New York Stock Exchange's manual cross. That's according to a study by brokerage house White Cap Trading. The firm based its conclusions on an analysis of the closing price data of Wal-Mart, which is listed on the New York, and of Microsoft, which trades on Nasdaq. Wal-Mart traded with "considerable volatility" during the final 15 minutes of trading on the most recent Quad Witch day, according to the report. That produced a price "dislocation" at the close that was about ten times larger than that of Microsoft. Also, ten minutes after the close, the Wal-Mart bid was 10 cents higher than its closing price. By contrast, at the same time, the bid for Microsoft was near its closing price. It also took the New York over seven minutes to release the closing price of Wal-Mart. Nasdaq published Microsft's closing price in only nine seconds. White Cap is a Nasdaq market participant, but not an NYSE member.