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April 3, 2008

Last Sale

By Michael Scotti

Stunned" was the word traders used to describe Bear Stearns' fall last month. It's hard to believe the firm is gone, they said. What's worse, a stock that traded at $160 a year ago, is now valued at $2 a share in a sale to JPMorgan. That represents a staggering amount of lost wealth for millions of shareholders. Mutual funds, pension funds were big losers, but Bear's own employees held about 30 percent of the stock. It's painful to think about how many former and recent employees were routed financially-friends, acquaintances and former colleagues of yours and mine.

Precipitated by an old-fashioned run on the bank, the name of Bear Stearns now sadly joins a list of illustrious firms that have closed in the last 40 years. For some it was mis-marking trades, like in Kidder Peabody's case, and for others it was the back-office mess, which claimed a number of old-line firms. History books are our only reminder of big White Shoe firms that couldn't make it, like Loeb, Rhodes & Co. and McDonnell & Co. Not many of us were around in 1970, when firms couldn't clear and settle trades properly. Still, you can be sure Bear Stearns won't be the final addition to this long-running chapter of failed firms.

But Bear Stearns' demise also represents the end of an era. It was one of those rough-and-tumble firms that provided opportunity to hundreds-if not thousands-of middle- and working-class people to get into the trading business. These were people who would otherwise never have had the chance to work on Wall Street. Their rising through the ranks into well-paying jobs was legend. Former chairman Alan "Ace" Greenberg used to say that he only hired "PSDs"-those who were "Poor, Smart and with a Desire to become rich."

What gave Bears' PSDs one edge was their willingness to compete with upstairs dealers at other firms and the floor of the New York Stock Exchange. Institutional block trading has always been competitive, even before May Day, when commissions were unfixed, in 1975. This month's cover story analyzes today's competitive landscape-one that is primarily electronic and fragmented. With so many trading venues, including dark pools, this story looks at how fragmentation is impacting trading and the buyside. The article also points to some possible remedies to fix the situation, which, many believe, includes better technology. There's also a survey on the topic that 126 buysiders responded to that you might find interesting. Enjoy the issue.

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