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February 24, 2006

Lord Abbett's Big Move

By Nina Mehta

Back in 1983, when Ted Oberhaus joined Lord Abbett & Co.'s trading desk, all business was conducted by phone with full-service brokers. Things change. Now 55 percent of the firm's trades are executed with the help of electronics. And Oberhaus, a partner and director of equity trading since 1996, expects that percentage to climb because of tech-related efficiencies. Five years ago that figure was less than 1 percent.

"When we moved to Jersey City in 2000, we took the tack that we wanted to become as tech-friendly a desk as possible," Oberhaus says. "We signed up with every vendor we thought could offer us best execution-FIX engines, ECNs, algo providers and crossing networks." The desk relies on crossing networks, which comprise 35 percent of its total business. Another 20 percent is done via DMA. Lord Abbett uses algorithms from Credit Suisse First Boston, Morgan Stanley and UBS. Liquidnet recently joined the ranks of the desk's top five brokers. Traders piecing together liquidity also use Bloomberg Tradebook, ITG and Pipeline.

As his desk's use of algorithms grew, Oberhaus noticed algorithms-originally intended for low-touch order flow-actually had better performance when traders kept an eye on them, adjusting their parameters during the trade. "The original idea was that you could buy 5,000 shares of IBM through an algo and never have to look at it again," he says. The reason for monitoring algo trades is to ensure they aren't being gamed, he says. The 12 traders on Lord Abbett's desk all use algorithms. They finesse their percentage-of-volume parameters and level of aggressiveness on each order.

"Two days ago I had an algorithmic trade where I probably hit 500 keystrokes on one order," Oberhaus points out. "That's manually intensive-much more so than using a full-service broker."

The desk has grown along with the increase of self-trading tools. In 2000 the desk had six or seven traders. But the increase in head count, Oberhaus believes, has helped investors and shareholders. The firm's investment performance is better because of increased self-trading. The use of algorithms has impacted Lord Abbett's desk in another way. Wall Street firms and other algorithmic vendors provide report cards to buysiders to let them know whether they're using the right algo for an order and whether they are properly adjusting the strategy as the market changes.

"Based on that measurement, which is done on a T+1 or T+2 basis, we realized we should measure every transaction on our desk in closer to real time," Oberhaus says. He adds that a problem with transaction cost analysis is traders can't remember why they executed an order a certain way months after the trade. "If I can sit down with a trader the day after a trade and review it, we can learn from mistakes and refine the process accordingly," he says. For the past year, Lord Abbett has been working with TCA firm Abel/Noser and Macgregor, its OMS provider, to get pre-trade and post-trade analysis on a next-day basis. Oberhaus says he expects to have a T+1 TCA tool in the second quarter.

Lord Abbett & Co.

Equity AUM: $76 billion

Desk: 12 Traders

Electronic Trading: 55 percent

Broker List: 80 Firms

OMS: Macgregor

Trade-Cost Analysis: Abel/Noser