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January 1, 2007

A Friend of TCA

By Michael Scotti

A few years back a friend-a consultant in equity trading-asked me to explain in simple

terms what a trader does. Here's a snippet from the piece: "Who wouldn't be able to argue the point that trading equities ranks among the most difficult jobs on Wall Street? Here's why: Rarely are two trades exactly the same. The sheer variety of stocks and a dynamic marketplace create a multitude of changing situations, causing traders to always be on their toes to spot opportunity. Because trading situations are always changing, equity trading is both a challenging and complex job. Think about it. Factors like momentum, volatility, order size, type of stock and trading volume impact a trader's decision-making process from the time an order is received until the broker sends back the final fill."

When that was written, direct market access was in its infancy and ITG's POSIT was the only successful crossing network. Trading tools have certainly advanced and become more electronic since then, but I believe what drives trading and trading decisions really hasn't changed. A recent survey of buyside traders, sponsored by Liquidnet and Greenwich Associates, reports that six out of seven buysiders "agree that they add more value now than they did three years ago." Clearly, buyside traders have greater responsibility today: They're trading more orders themselves and handing off fewer orders to brokers. I would imagine, though, that the perception of adding value must be a continuum: What would buyside traders have said three years ago if asked the same question?

Surveys can be revealing and provide insight. Last month, Traders Magazine posed eight questions to the buyside on trade-cost analysis in a survey. The results were telling: 39 percent responded that trade-cost analysis plays a role in their compensation, and even those who don't put much stock in the accuracy of its results, believe that trade-cost analysis will become more prevalent. The survey and story are in this issue.

I'd also like to mention an absent friend who was a fan of any tool that lowered trading costs. Michael Keady died last month after a short battle with cancer. He was 48. Mike Keady's career spanned the evolution of trade-cost analysis. Mike helped put TCA provider Plexus Group on the map through his sales efforts. He was also a tremendous resource to me and to others, always offering his time and insight. Our October cover story on mutual fund boards would not have happened without his guidance. He took the time to help a friend, even after his condition took a turn for the worse. Oh, and that piece I wrote that described the job of a trader? That was written for Mike Keady. Mike will be greatly missed by many.

Michael Scotti

Editorial Director