Richard Schenkman is chief executive officer of the BRUT ECN. He was previously chief operating officer at Instinet and spent 15 years there before joining the broker-friendly' electronic communications network in May 2000.
BRUT is owned by systems vendor SunGard and 29 broker dealers including Morgan Stanley, Goldman Sachs, Merrill Lynch, Salomon Smith Barney and Bear Stearns. Best known for facilitating inter-dealer Nasdaq trading, BRUT in the last six months, has stepped up its courtship of the buyside.
BRUT, formed in 1998 and enlarged by last year's merger with STRIKE Technologies, is one of six ECNs which control the lion's share of ECN trading. The others are Instinet, Island, Archipelago, REDIBook and Bloomberg TradeBook. Schenkman sat down with Traders Magazine reporter Peter Chapman to answer questions about BRUT's strategy.
Traders: BRUT is going down a different road than its competitors. Please explain why.
Schenkman: Certainly. Two camps are evolving. One group of ATSs is focused on disintermediation. They're bringing buyers and sellers together, but, in doing so, they're creating a wedge between an investor and his agent. They are using the execution function to compete for the client against the traditional broker. ECNs in this category are Archipelago, Instinet, Bloomberg TradeBook, and Island, through the Datek connection.
This competition produces value for a user, but it also produces conflict. A user must choose either the value he receives from his traditional broker – research, deal flow – or that which he gets from an execution-provider. It's an or' choice.
Traders: How is BRUT different?
Schenkman: We are offering investors an and' choice. BRUT is putting together the relationships that the traditional brokers have with the solution of an electronic execution provider.
Traders: How are you doing that?
Schenkman: I'll give you one example. In our dealings with institutions we enter into a commission sharing arrangement with the broker. We get a portion [of the commission] and the broker, chosen by the institution, gets a portion. That commission goes to the relationship that the institution has with that broker.
Traders: You are partnering with brokers?
Schenkman: Yes. In most cases, the broker finds the customer. We get referrals. They target their customers who are trading electronically.
Traders: So the customer gets an electronic execution, but preserves its relationship with the broker.
Schenkman: Exactly. Remember, the institution only has so much to pay out in commissions. And he is going to trade electronically.
Traders: What does it mean in dollars and cents?
Schenkman: [An institution] will go to its traditional broker, pay five cents and maybe get research and other value-added services. It will not get an electronic execution. If it uses an ECN to trade it will pay two cents and get the value it perceives in an electronic execution – anonymity, neutrality and control. What we are saying is: pay us three cents and we will send two cents to the broker of your choice. We get the entire three cents because the institution wants all of the services an ECN provides. We have the relationship with the institution, but are sponsored by the broker.
Traders: Why would brokers steer business to an electronic competitor like BRUT?
Schenkman: The brokers are being very pragmatic. They realize that, as far as electronic executions are concerned, the genie is out of the bottle. In order to service their customers they must open up their suite of services. We give their salespeople the ability to go to a buyside desk and sell electronic executions.
Traders: Are you working exclusively with BRUT's 29 broker-shareholders?
Schenkman: No. We are working with them as well as other brokers.
Traders: Is this a new strategy for BRUT?
Schenkman: The whole buyside sponsorship model has been around since 1998, but we've only started to aggressively work the model in the last six months. That's because our ECN is finally getting some significant volume. It's to the point where institutions are going to want to trade on BRUT.
Traders: What is the story of your volume?
Schenkman: Before the merger with STRIKE [February 2000] both ECNs were each doing about 25 million to 30 million shares per day. Now we are doing 100 million. We're ranked third according to Nasdaq. On some days we hit 5.5 percent to 5.75 percent of total Nasdaq volume. We've been very successful building up this ECN.
Traders: How have you managed to boost volume so much?
Schenkman: Of course, we have been predominantly a market maker tool. But, in the last seven months, we've spent a lot of time going into the brokers and finding other places that have a need for an electronic execution. Places like the program trading desk and the derivatives desk.
Traders: How many customers do you have?
Schenkman: We have 250 broker dealer and 35 institutional customers. We've added 25 or 30 new ones in just the last two months. All totaled, that's 3,000 users.
Traders: Why is BRUT choosing this path and not the way of disintermediation?'
Schenkman: BRUT is owned by 29 of the largest firms on the Street. That ownership structure allows us to produce this model.
Traders: REDIBook is also owned by several brokers. Does that mean they are in your camp?
Schenkman: They are closer to our camp than that of the total disintermediaries.
Traders: You are doing something in the retail area as well?
Schenkman: Yes. We are allowing brokers to private label BRUT so they can provide after-hours trading to their direct retail customers. The brokers can provide direct access to Nasdaq like Datek.
Traders: Last summer you announced you'd joined Nasdaq's InterMarket for listed trading. When will the service be available?
Schenkman: We expect it to be functional in the latter half of the year. We want to make sure we have all the destinations up and running including the New York Stock Exchange before we offer listed trading. So when someone wants to execute a listed order they will be able to do it in the traditional way; post it in the InterMarket; or post it on an ECN.
Traders: Do you consider yourself an agency broker like Instinet or Bloomberg TradeBook?
Schenkman: No. BRUT is an enabling' broker. They are disintermediating. We work with the brokers.
TM: Thank you.