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February 2, 2006

PMs are Watching

By Editorial Staff

*Portfolio managers are adopting the same analytical tools now used by their traders. The trend is likely to alter the relationship between the two. That's the conclusion of top brokerage executives Gene Choe of Credit Suisse and Carl Carrie of JP Morgan Securities. The two were speaking at a recent Financial Markets World conference in New York on advanced execution strategies.

"Portfolio managers can be far more active in [the trading] decision-making," Carrie observed, "and buyside traders can influence the portfolio manager." The exec said his firm is developing Web-based tools that show the relationship between a portfolio manager's decision to buy or sell a stock and the trader's decisions about how to execute that order. These tools give portfolio managers real-time analytics and the ability to alter their strategy based on the executions.

-Nina Mehta

Internal Crossing

*Morgan Stanley is moving to automate its internal crossing of retail and institutional orders. Scott Stickler, an executive director in Morgan Stanley's institutional equity division, told the crowd at a recent industry gathering that his firm crosses retail and institutional customer flow internally where it can. He added that the internal crossing process is shifting from a manual to a more automated one.

"We've been doing some level of crossing in our algorithmic trading for quite some time," Stickler said at a Financial Markets World conference. "We have found it to be quite beneficial." Internal crossing helps customers by enabling them to interact with other customer order flow, Stickler said. He described the process as similar to that of crossing systems such as Posit, Liquidnet, Pipeline and Millennium. "Customers have an outlet for their block-oriented flows," he said, adding the process executes orders more efficiently and at lower cost. Morgan Stanley lets customers decide whether or not they want to cross their orders internally if that potential exists.

-Nina Mehta

Floor Protest

nA group of New York Stock Exchange floor brokers is asking the Securities and Exchange Commission to reject the Big Board's hybrid market plan. The Independent Broker Action Committee (IBAC), a group that claims some 100 members, contends the NYSE plan fails on two counts. First, it lacks details about promised broker discretionary orders. Second, the plan vests too much power in the specialists. Specifically, IBAC is upset that specialists will be given advanced trading powers that its members lack. That will tilt the balance of power too much towards the specialists.

The market makers will have algorithms with which to capture trades and new rules giving them a previously off-limits form of parity with floor brokers, the group said.

"The specialist's negative obligation' would thus be turned on its head," Warren Meyers, IBAC's president said, "as specialists would be permitted to use their information and speed advantages to participate in proprietary trading to a much greater extent than they are today." In response, Big Board officials told Traders Magazine they are filing documents with the SEC describing the discretionary orders.

"I think they just want to make sure they keep the pressure on us," an NYSE official said. The exchange, he added, is preparing systems documentation to support this new discretionary order. "We're still in the specification documentation process, preparing things for the coders," the official said.

-Gregory Bresiger