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John Turney
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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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May 10, 2006

Legg Mason Traders Win Out after Stifel Merger

By Peter Chapman

Legg is in. Stifel is out. Stifel Financial's recently completed takeover of Legg Mason's capital markets group has left Legg's equities trading group largely intact. The same cannot be said of Stifel's operation.

"Not everyone made the cut," explained Tom Mulroy, Stifel's (and the former Legg Mason's) head of equity capital markets. "Most of our people made it because we were the bigger piece of the capital markets effort."

Most of the nearly 40 Legg Mason equities trading staffers have kept their jobs. Most of the 20 Stifel employees have not. The new operation consists of about 40 traders based in Baltimore, home of the old Legg Mason, the NYSE floor and various other offices. An agency desk is run out of St. Louis, Stifel's headquarters.

Stifel bought Legg's capital markets operation from Citigroup. The financial giant had just swapped its asset management division for Legg Mason's brokerage arm, but didn't need 400 capital markets employees.

Stifel did, however, as it was a relatively minor player in the business of underwriting and trading securities.

Stifel's strength was its thriving public finance and retail brokerage. It operated a small capital markets division.

"This was a great opportunity for them," said Mulroy. "They could go out and buy what they were missing. And for us, we were able to keep this 400-person organization together.

Before the deal, Legg Mason ranked about 35th based on shares traded in the AutEx BlockData surveys. About 70 percent of its flow was listed. The rest was Nasdaq.

The "old" Legg did about 70 percent of its flow with institutions and 30 percent with the retail public. By contrast, the "old" Stifel did about 95 percent of its flow with the retail public.

Today, the firm does about 80 percent of its flow with institutions and 20 percent with the retail public. Legg's equity sales and trading operation took in $134 million in 2005, up from $111 million the previous year.

Before the deal, Legg was making markets in about 500 over-the-counter stocks. Stifel was trading between 250 and 300, mostly regional bank names. The "new" Stifel now trades 750 OTC names.

"We kept the majority of the Stifel stocks," explains Chris Wasson, in charge of Nasdaq trading, "primarily to support the retail effort." (Stifel has about 700 retail brokers in about 90 offices.)

As part of the integration process, the trading department decided to consolidate all trading on NYFIX' Renaissance trading and order management system.

Both firms previously used NYFIX' Fixtrader for listed trading and SunGard's Brass for Nasdaq market making.

The new set-up will allow Stifel to trade both listed and Nasdaq names on one platform. "It greatly reduces our infrastructure costs," noted Wasson.