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April 21, 2005

From High Touch to High Tech at Merrill

By Peter Chapman

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Merrill Lynch, a block trading house long esteemed for the skills of its high-touch traders, is now embracing a more high-tech approach. New leaders at Merrill are promoting more computers in information-gathering as well as in the execution process. "We are investing in automation where it enhances the performance of the firm and the execution outcomes for our clients," says Mike Stewart, Merrill's newly appointed head of global cash equity trading.

At least three major developments are underway at Merrill: a direct access front-end trading platform, various algorithmic trading models and a market data crunching system. The fruits of its labors will be used internally and by institutional customers on a self-service' basis. That means Merrill's customers will be able to use the technology to trade by themselves instead of having a sales trader handle their order.

Behind all this technology is an attempt to meet buyside demand for lower commissions and to construct a cost-efficient trading infrastructure. The situation is the same at brokerages across the Street as regulatory mandates have forced both the buyside and the sellside to flatten their cost structures.

Merrill is not regarded as a leader in the Street-wide push toward automation. But it is coming along fast. In the past 12 months, the broker has made investments in both personnel and technology in its bid to catch competitors such as Goldman Sachs, Morgan Stanley and Credit Suisse First Boston.

Catching up is essential. In institutional equity trading over the past four years, Merrill has under-performed most of its peers, according to data compiled by Citigroup Smith Barney. Merrill's revenues from equities trading declined 12 percent during this period from $3.5 billion in 2001.

Merrill's "growth lags [its] peers in all of its major businesses and regaining momentum will not be easy. This is particularly true in the sales and trading business," Chris Meyer, a brokerage industry analyst at Morgan Stanley, noted in a recent report.

Another observer is more upbeat. Merrill's "shortcomings are a low share of electronic trading and a very small prime brokerage business," Citigroup Smith Barney analyst Ruchi Madan writes. But recent hires "are likely to help Merrill catch up," she concludes.

These days two execs with substantial electronic trading backgrounds are guiding Merrill's equity trading department. Besides Stewart, there is Rohit D'Souza, Merrill's new head of global equity trading. He is responsible for cash equities, equity-linked products, and strategic trading. Stewart, formerly Merrill's head of program trading, runs the cash business.

Last fall, Merrill hired D'Souza away from Morgan Stanley. He was in charge of North American equity trading, a position that took in cash equities, equity derivatives, program and electronic trading. D'Souza, regarded by some as an electronic trading whiz, is credited with the development of Morgan Stanley's highly regarded Passport front-end trading platform. D'Souza was accompanied to Merrill by six trading technologists, also from Morgan Stanley.