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July 5, 2006

Finding Better Executions

By Nina Mehta

Freestone Capital Management decided in late 2002 that it needed to understand its execution process better: What happened with its order flow once it hit the sellside?

A few months later, in February 2003, the Seattle-based asset manager ramped up its trading desk and hired Nenad Yashruti as head trader. Yashruti had been head of the Seattle trading desk for National Securities, a market-making firm with 350 retail and institutional brokers and trading desks in three cities.

"The portfolio managers wanted to understand why the prices they were getting were the prices they were getting-and if there was liquidity trading in the market, why couldn't they be part of it?" Yashruti recalls. He immediately began exploring alternative trading systems. Soon, Freestone was using Liquidnet and Pipeline, major new crossing networks, he notes. Freestone, which has $1.8 billion in assets from high-net-worth individuals, manages $1 billion in equities through its 2-person trading desk in Seattle. The firm's core equity portfolio includes about 20 names. The asset manager also has small-cap and mid-cap funds with about 100 names combined.

Freestone's electronic trading probably remains under 50 percent, says Yashruti, but in the last couple of years it has increased across all areas, from crossing to direct market access and algorithmic trading. Yashruti uses ITG's suite of electronic and crossing products, FutureTrade, Liquidnet, and Pipeline, among others.

With technology systems changing rapidly, Yashruti says buyside traders now have new responsibilities. First, they need to do more for portfolio managers searching for liquidity, particularly with new trading venues and dark liquidity pools being rolled out by brokers.

Sharing this knowledge can only benefit traders in the long run. "If portfolio managers are more savvy about trading and understand the crossing and alternative trading systems that are available, they're likely to give the trader, who knows more about the systems and how the market for particular stocks trades, more leeway in executing orders," Yashruti says. Yashruti notes that a portfolio manager might tell him to buy 300,000 shares of a stock with a "soft limit" of $25.25, but will give him discretion to go up 80 basis points if he can get the order executed quickly. "So I can pay up to $25.452 if I can get size done or if I believe it is the right thing to do," he says.

The second thing Northwest buyside traders should do more is use the Seattle and Portland affiliates of the Security Traders Association. The Seattle STA has 32 members, says Yashruti, a board member. Membership has dipped from 60 traders in 2000, but there are many untapped money managers. "Talking to your peers and the sellside is incredibly important to help understand how to get over trading hurdles and to generate new ideas," he says. "You just can't learn as much sitting behind a computer."

Freestone Capital Management Equity AUM: $1 Billion Desk: 2 Traders Broker List: 15 Firms Avg. Comm.: 2-3 cents per share OMS: Moxy/Advent Trade Cost Analysis: ITG and QSG