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July 1, 2008

The Great Migration

Sales traders flock to independent shops for greener pastures

By James Ramage

One man's loss is another man's gain. That sums up the world of sales trading today, as money managers have slashed their high-touch commission spend at full-service shops and shifted more of their business to small but scrappy independent brokerage firms.

The result has been a steady flow of sales traders-over the past two years or so-out the doors of large, full-service firms and into the open arms of the "eat-what-you-kill" institutional brokerages.

"You're seeing a big migration right now because of the difficulties faced by the bulge bracket model," says Dante Ferrarie, managing director of sales trading at LaBranche Financial Services and, until recently, head of sales trading at Merrill Lynch. "With the bulge bracket trying to cut costs and push everything toward the electronic space, guys with deep, long relationships have decided to go to the independents to leverage these close relationships in a very matter-of-fact, high-touch style."

Those sales traders who remain behind at the bulge bracket firms have seen their roles redefined as they are saddled with additional products and services. Those who move to the independents keep their focus on cash equities, but must deal with a radically different culture.

In either case, they may be making less money than before-though top sales traders can actually do better. Less money is better than no money, though, a possibility many former sales traders face.

Thinning the Ranks

Their ranks have been thinned dramatically in the past few years at the largest firms as their employers try to cut costs to match sharply lower revenues. According to Eric Moskowitz, head of compensation consulting at Options Group, a New York-based global executive search and strategic consulting firm, 20 percent of bulge bracket sales traders have either lost their jobs or have gone to independent firms over the past nine months. That number has been boosted by the Bear Stearns collapse.

One bulge bracket firm, which declined to be identified, says the number of its sales traders has fallen about 45 percent over the last two years.

Behind this trend lies the changing nature of the relationship between the full-service firms and the buyside. Investment advisers want to reduce their trading costs, so they are running their easy-to-trade, large-cap orders through cheap, low-touch tools. Bulge shops eager to hang onto the high-volume business are making the tools available despite the lower rates.

At the same time, money managers are doing their own research or paying for it with a check. Those factors give buyside traders the leeway to shift the business to sales traders of their choice. These trades-mostly difficult small- and mid-cap names-have gone to less expensive independent shops, and to sales traders with whom they've had long relationships. These nimbler shops also don't have the huge cost structure of the bulge bracket firms.

Adding fuel to the fire is sellside tiering. Bulge shops have for the past few years been grouping their customers into tiers, often depending on how much business they send their way. For many on the buyside, that can mean access to electronic systems but not sales traders.

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