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January 2, 2007

From Zero to 60 at NWQ

By Michael Scotti

High-performance cars are typically judged by how quickly they accelerate from zero to 60 miles per hour. If a similar measure of efficiency existed for today's buyside trading desk, it would likely chart how quickly the desk adapted to electronic trading. Kirk Allen joined NWQ Investment Management four years ago, when the desk, then managing $7.5 billion in equities, did almost no electronic trading. Today, domestic assets have ballooned to $35 billion and electronic trading comprises 60 percent of all trading.

The West Coast value investor executes about 30 percent of all order flow in crossing networks, while another 30 percent is split between program trading and algorithmic strategies, says Allen, a senior vice president who heads equity trading. "We went from almost zero electronic business to 60 percent, and it's still growing," says Allen, a 15-year trading veteran.

NWQ brought in FlexTrade as its execution management system (EMS). That allows the desk to utilize the EMS's pre-and post-trade functions and its benchmarking tools, Allen says. But FlexTrade's greatest contribution might be its connectivity to the multitude of crossing networks. "That's our electronic gateway," he says.

The size of the average order placed in crossing networks is typically 250,000 shares, Allen says. "We do some pretty good size when we get a hit," he notes. But he admits it's hit or miss with them. "One day we might do a ton in ITG's POSIT Now, and the next day it might be dry, and we're having success in Liquidnet in that same stock," Allen says. NWQ also uses Pipeline and NYFIX Millennium, he adds. "We're finding the majority of the block flow in these systems."

Although a fan of the crossing systems, Allen is skeptical about how much more market share they can capture. At the same time, he foresees an increase in demand for capital from upstairs desks. For NWQ, the need is to lessen market risk when trying to establish a position in a large order. Some NWQ orders can be as large as 25 million shares and take weeks to complete. That's partly why he expects his shop to double its use of capital in the next year. The desk currently requests capital for about 10 percent of the shares it trades.

Portfolio managers at a value shop such as NWQ aren't big fans of paying up 15 or 20 cents to complete, say, a third of a 15-million-share order, Allen explains. He adds though, that it is sometimes in the best interest of a fund's performance to do so. After a large trade is completed, the desk will sometimes review it to see if using capital would have been more cost-effective, and that analysis is then shared with the portfolio managers. Allen thinks this exercise is beginning to make them more comfortable with using capital in certain situations.

NWQ Investment Management Equity AUM: $35 billion Desk: 4 traders Broker List: 50 Avg. Commission: 3.2 cents OMS: Charles River Trade-Cost Analysis: ITG, Plexus & Elkins/McSherry