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July 5, 2006

Old-School Trading

By Michael Scotti

It is true that equity trading is going more electronic, and has been for the last few years. Dark pools of liquidity will continue to grow. And in recent years, block trading has become somewhat of a stepchild in the business. Well, don't sell block trading short just yet. That's the gist of this month's cover story on block trading, an old art that once defined the institutional business: trading in size of hundreds of thousands of shares or more. Brokers, tired of seeing flow go the way of passive dark books, have in recent months stepped up to the plate using their capital, particularly to their best accounts.

As one source suggested, there's been turmoil' in the business, brought on by new technology and fragmentation, as well as the declining economics of the cash equities business. And some buyside traders are going back to the familiar, or at least trying. And that means block trading.

As the industry continues to evolve and to morph, as one trader pointed out, there will be a place for block trading and brokers using capital. Clients will continue to use algos and crossing networks. But old-school block trading will not die. It will, however, change.

Washington has produced plenty of news in the last year or so-some might say too much. This month is no different. The anti-climactic announcement that the SEC has delayed Reg NMS didn't come as a surprise, but the industry did breathe a sigh of relief upon hearing the news. You can read about it in both our Washington Watch and At Deadline sections.

Managing Editor Gregory Bresiger also took the opportunity last month to interview SEC Commissioner Paul Atkins, a career attorney with an interest in economics.

Bresiger, who considers himself a student of Austrian economics, was smitten by the fact that Atkins had read many of the classic works of these great thinkers such as Carl Menger, Ludwig von Mises and F.A. Hayek, but with one difference: Atkins has read them in the original German.

You also can read about Atkins' market structure thoughts in our Q&A section. Atkins, an unyielding critic of Reg NMS, still favors an opt out provision for the trade-through rule. The basic problem with the rule, Atkins warns, is that it leaves too much discretion to the SEC staff. It is a rule that is confusing, he says. Therefore, it that will leave too much leeway to the staff in how it is interpreted, Atkins warns. It's an old story. Just read Alexis de Tocqueville. Enjoy the issue.

Michael Scotti

Editorial Director