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December 6, 2006

Work It to Death

By Michael Scotti

Working orders the old-fashioned way. That's how Chris Willox describes how he adds alpha for clients of Fenimore Asset Management, an upstate New York manager with $2.1 billion in equities. "I would rather work an order than hand it out," says Willox. "That's what I used to do when I was a broker: Work the order to death."

Indeed, Willox had plenty of practice working orders before heading to the buyside in 1996. During his 10 years at BT Brokerage in New York, working under Ken Ducey, Willox traded at the Banker's Trust brokerage arm. He worked corporate buybacks and purchases of company stock for employees' retirement plans, or ESOPs.

Fenimore's turnover is low, about 10 to 12 percent a year. Willox describes the firm as a bottom-up, Graham and Dodd value manager. Its predominant stock pick is an illiquid name. Holdings are concentrated in some 50 stocks.

"I love the electronics," Willox says. He's very interested in how two new crossing systems-Bids Trading and Level ATS-will help him achieve best execution. "I love all these new toys."

Willox learned trading in a high-touch world, but has adapted to today's marketplace. Fenimore was one of the first buyside firms to use Schwab's CyberTrader, back when ECN aggregators were in their infancy in the late 1990s. He's continued to evolve his desk by adding various algorithmic strategies in recent years, including those offered by Credit Suisse, ITG and Instinet. Willox just added Bloomberg's execution management system.

About 80 percent of the flow is executed electronically at 2 cents. Willox says accessing liquidity now is easier than when the only option was using a sales trader. The buyside is better served today, he says, because there is less leakage and market impact with self-trading.

Another benefit of self-trading is that a trader can use multiple strategies to execute an order, he says. Willox also thinks the current problem of fragmentation due to multiple "dark books'' will get ironed out as these systems connect or merge. "There are so many ways to hide and disguise an order, and that helps me," he says. Many of his stocks would run if others in the market learned of his intentions and wanted to ride along, he says.

"It's great to be on the buyside because you get to try these new tools. And you have to, because they could work," Willox says. "If you're not tapping into these systems, then you're not getting best execution. Traders need to tap into all the liquidity pools out there."

When building a position, Willox uses the various dark pools along with an algorithmic strategy. But typically he begins seeking size in the third market.

Despite a small brokerage list, Willox responds to a broker with natural merchandise, even if the firm is not a usual trading partner. "If they have the other side," he says, "then I'm going to get it done."

Fenimore Asset Management Equity AUM: $2.1 billion Desk: One trader Broker List: 12 firms Avg. Commission: 3 cents OMS: Advent's Moxy Trade-Cost Analysis: VWAP