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September 12, 2006

Lehman Steps into the Future and Readies ATS Rollout

By Peter Chapman

Lehman Brothers will launch an alternative trading system later this year that will probe both internal and external sources of liquidity for executions.

The move is not the first by a major broker-dealer, but is unlikely to be the last, according to sources. The stock market of the future is expected to resemble a network: multiple pools of liquidity - with prices either displayed or undisplayed - tied together.

"The ATS is both a pool of dark liquidity," explained Mike Bleich, Lehman's head of liquid strategy for U.S. equities, "and an aggregator of external dark liquidity. We put both of those functions under one umbrella."

Bleich, who has been working full-time on this project since the beginning of the year, adds that the ATS will be linked to "four or five" non-displayed pools of liquidity by year's end. The liquidity residing on these books may be in the form of small orders or large, Bleich notes.

The exec won't disclose the names of the pools to which the ATS will connect.

Likely candidates for connectivity are bulge-bracket ATSs, independent crossing systems such as ITG/Posit or NYFIX Millennium and the books of stat arb players such as ATD.

Bleich adds that he is in talks with other dark liquidity pools regarding potential connectivity.

Goldman Sachs was the first of the bulge firms to announce its intention to operate a dual-function ATS when, in January, it unveiled Sigma X. (See Traders Magazine, January 2006) The ATS aggregates internal liquidity as well as probes the books of other systems such as Liquidnet and ATD.

Behind the Lehman initiative, Bleich notes, is concern on the part of Lehman's institutional customers over getting large orders done.

"There is a lot of fragmentation," the exec says. "So customers are having problems trying to get access to chunky-sized liquidity. My group is tasked with helping them do that."

Users of Lehman's ATS will be able to post orders anonymously in the system and wait for a match or use a Lehman algorithm to probe the ATS or outside books.

These are still the early days as far as interconnected pools of liquidity are concerned, but hopes are high on Wall Street for such a world.

"That is where the market seems to be heading," said Bleich. "Access to multiple linked dark liquidity pools creates more value for our customers than a single dark book."

The Lehman ATS has been filed with the Securities and Exchange Commission.