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January 31, 2008

Bravo, Bravo for High Touch

By James Ramage

At a time when electronic trading has developed deep roots, Michael Crockett of Brazos Capital Management still favors picking up the phone and talking to his brokers.

And as the Dallas-based firm takes mostly a hands-on approach to trading growth stocks in the mid-, small- and micro-cap areas, that means Crockett works the phone quite a bit.

The man appreciates his broker relationships, but only to the extent that they add value to his firm. So by early 2006, Crockett realized it would be more efficient if he dealt with fewer of them. At that point he started slashing his list of trading brokers to the roughly 10 he has today. That's down from nearly 200 brokers--an eye-popping number for a firm with a little more than $615 million in equities under management.

"There's just no way to manage that many relationships," he says. "Now it's very efficient, very clean." Brazos today maintains research relationships with another 10 brokers.

Crockett says his days as a sales trader with a small firm on the West Coast provided early insight into unbundling. Trade-cost analysis helped provide the performance gauge to determine his best brokers, while client commission arrangements helped with the chopping. He's found CCAs to be a boon, but the truncated trading list isn't the last word. Crockett's hunt for best execution means he'll trade with brokers bringing natural flow, even if they aren't normal execution partners.

"It's not that ties are completely cut, but there are firms that work for that order flow and traffic in those names," he says. "Well, they make noise, and they see business."

Agency brokers dominate Crockett's list of trading partners. Mostly, though, he wants to be sure he trusts the guy on the other end of the phone. And he's very selective about shopping his orders. "There are about five traders I trust completely," he says.

For the trading itself, Crockett says three things are critical starting points for success with small- and micro-cap orders: know who trades the names, access dark pools efficiently and recognize the implicit trading costs.

"When you send an order, you have to be able to recognize that the market's moving," he says. "Is that the result of a sales trader shopping an order to the wrong counterparty and that person trading ahead of you? Is it that I'm spending too much time in the public market and opportunity costs are starting to weigh in?"

Even though he's a high-touch guy, he makes a point to road test as many of the newest trading tools as he can. Crockett is on a perpetual search for trading technology-whether that's systems or order types-to find the best fit for Brazos' needs.

"The skill set in today's environment-you have to be able to manage the entire process. And it's not just a high-touch order anymore," he says. "It's not just throwing something into an algorithm. It's a combination of utilizing all the different avenues."

Brazos Capital Management

Equity AUM: $615 million

Desk: 2 traders

Broker List: 10 firms

Avg. Commission: About 2.5 cents

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