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Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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January 3, 2006

Leveling the Playing Field

By Michael Scotti

Technology is equity trading's great equalizer. Tools like DMA aggregators, algorithmic strategies and matching systems are found on the desks of both large and small money management firms.

That axiom also applies to Citizens Advisers, a Portsmouth, N.H., firm managing $650 million in equities. "An outsider looking at a small mutual fund company in Portsmouth, New Hampshire, might not think we have the latest trading technology," says head trader Kevin Schneider. "But we have all the tools we need to get our business done."

The firm just installed Goldman Sachs' RediPlus front end, primarily to access Goldman's algorithms. On a dollar basis, about 44 percent of the firm's flow is executed electronically. The largest percentage of that business is done using DMA tools like FutureTrade and ITG's Radical product. Algorithms account for between 5 percent and 10 percent of total flow. That percentage should increase soon, Schneider says. But it will come at the expense of DMA, not high-touch trades, he says. That's because Citizens still values brokers with investment ideas and who find liquidity.

But how can a sub-$1 billion firm attract attention from the Street? "You've got to pay brokers," Schneider explains. But it hasn't been easy. At the same time Citizens moved toward electronic trading and cheaper commissions, the firm's trading turnover plummeted. At fiscal year-end in September 2003, turnover was over 250 percent. The following year it was still a healthy 180 percent. After a management shift and a new chief investment officer joined, turnover was more than halved, down to 84 percent in the period ending September 2005.

How did Citizens maintain service from the Street? "We cut our brokerage list from about 36 firms down to 12," Schneider reports. About two years ago, a quarterly brokerage ranking was set up. The stock picking and trading sides of the firm work together to decide which brokers will be rewarded the following quarter, Schneider says.

The analysts and portfolio managers depend upon the trading desk's market insights, he points out, as well as the company specific information it can gather from the Street. That is possible because the desk's two traders think like portfolio managers, Schneider says. Both Schneider and trading colleague Phyllis Chambers hold CFAs. "We know the type of information they are looking for," he says.

Although the firm espouses a "buy-and-hold strategy," Citizens can be nimble reacting to information and liquidity flows, he says. Because the firm is small, there is a close relationship with the portfolio managers and little bureaucracy, he says. "We're definitely on the same page," Schneider adds.

Schneider, a former vice president in operations at Lazard Asset Management, joined Citizens in 2000 to head its operations. When the firm switched from indexing to active management 18 months later, Schneider was tapped to head trading, which already reported to him.

It was an opportunity he couldn't pass up. "I had a lot of interaction with the traders over the years," Schneider explains. " I wanted to move on from operations and get involved in trading, which I thought would be a real challenge."

Citizens Advisers Equity AUM: $650 million Desk: 2 Traders Broker List: 12 Firms Avg. Comm: 4.5 cents OMS: Advent Moxy Trade Cost Analysis: VWAP