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June 6, 2006

Building a Growing Desk

By Nina Mehta

A move toward actively managed funds has altered the trading style at Charles Schwab Investment Management (CSIM) over the last 18 months.

In 2002, the asset management division of Charles Schwab Corp. launched a series of quantitative mutual funds based on its Schwab Equity Ratings (SER), a proprietary model for analyzing individual stocks. The funds run the gamut from small caps to large-cap growth, from hedged equities to a handful of sector funds. As the products grew, CSIM realized that its desk geared for index funds had shortcomings trading for the newer investment styles.

Greg Brida joined CSIM as head equity trader in February 2005. CSIM currently has $26 billion in equities under management $20 billion in index funds and $6 billion in SER funds. Brida had been an index portfolio manager and trader at CalPERS for seven years.

Brida's task was to build the desk from scratch. "For me," he says, "it's a dream come true. Schwab is a firm with real assets, not like a startup hedge fund that needs a head trader."

The desk includes two people. Brida trades for the active funds, while a portfolio manager/trader handles most of the index trading. Brida plans to hire a second trader for the active funds soon. The first order of business was obtaining a real-time trade execution system. CSIM had used an internally built OMS, which mainly facilitated back-office processing. The desk was already testing the Charles River OMS, and Brida added on ITG's Triton product. All trades now go through Triton.

The execution benchmark for Schwab's index funds had been market-on-close. Brida switched the bogey for the active products to an implementation shortfall model. "With index funds you're more passive. But with actively managed funds, you're on the hook, you have to get involved," he says.

Brida says his trading usually follows a pattern. "My trading process is a rotation out of crossing networks to agency desks with the potential for crosses, and then to brokers advertising liquidity for an individual name," he notes. Crossing networks comprise 15 percent of his firm's flow, while algos and DMA equal another 15 percent.

Crossing has become increasingly important in achieving best execution, Brida adds. Last month, for example, Brida had a large buy/sell dollar-neutral pairs trade. He worked half the trade in the open market and half in Posit. And, when the half in Posit printed, he canceled his order on the floor, executing the balance in Posit. Brida says he wound up trading 60 percent of the average daily volume in both names in half an hour. The trade price held up afterwards, too, he says.

CSIM's top brokers are ITG, Instinet, Cantor Fitzgerald, Nomura, Goldman Sachs, and Stuart Frankel & Co., an independent NYSE floor broker. Brida typically uses third-market brokers and program desks for smaller orders. He sends the more liquid names to the program desks of bulge-bracket firms, and blocks of illiquid stock to floor brokers or third-market brokers.

Charles Schwab Investments Equity AUM: $26 billion Desk: 2 Traders Electronic Trading: 30 percent Broker List: 20 Firms OMS: Charles River and ITG/Triton Trade-Cost Analysis: Plexus/ITG