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January 2, 2007

Bulge Brackets Move Past "Stock Jockey" Approach

By Peter Chapman

Bulge-bracket firms are changing the way they approach block trading.

Two of the Street's biggest trading houses have indicated they are exploring different ways to satisfy the liquidity needs of their institutional clients. The focus is on extremely large blocks, those weighing in at multiples of three to 15 days of a stock's average daily volume.

Both Lehman Brothers and UBS are looking to evolve from their roles as "stock jockeys," whereby they merely react to customers' incoming phone calls. They want to take a more sophisticated approach to committing capital.

"The economics are changing in the traditional block business because of the technology revolution and algo trading," said Bob Harrington, head of U.S. cash trading for UBS. "The business is going to evolve in a much different way."

Harrington was speaking at a recent Traders Magazine conference covering block trading.

New ways of doing business on block desks include working more closely with syndicate desks, alerting clients to names in which the desk is willing to commit capital, and fielding reverse inquiries from the buyside.

They also include discussing strategy with analysts sitting on the trading desk and maintaining ongoing dialogues with customers regarding certain stocks and sectors.

"The bigger accounts want to see more reverse inquiries from the sellside," explained Rob Arancio, co-head of U.S. liquid markets trading at Lehman Brothers. "That means desks are willing to put their capital behind their opinions and tell their clients they can help them be a liquidity event.'"

These big trades can either be done through the trading desk proper or in collaboration with the syndicate, or capital markets, desk, Arancio said.

Harrington added: "The changes going on in the business make it more conducive to working closely with your equity capital markets group [rather] than sitting there with a gun to your head and being subject to the last sale, which is moving so quickly given the algorithmic trading environment."

Harrington said he was involved in a new initiative with his sector heads and UBS's syndicate desk to work with certain clients regarding particular sectors and the firm's opinions on certain names.

"We've experimented with a handful of clients," he said, "and are going to systematically approach the marketplace as we move forward." Harrington pointed out that demand for broker capital is increasing as money managers' assets grow.