Salomon Smith Barney, Credit Suisse First Boston and several other dealers are undergoing a massive reshuffling of their trading desks, adopting what head traders term global sector trading.' In some cases, that means moving derivatives traders closer to block desks as well.
Traders said the reshuffle on the sellside follows a trend spearheaded by the desks at several Boston-based mutual fund companies. The rise in global, rather than domestic portfolio management spurred those firms to reconfigure their desks, they added.
"The direction that trading is going in is by sector," said Jon Olesky, head of block trading at Morgan Stanley Dean Witter. "Divergence in sector performances has never been as wide as it is now. We have bull and bear markets occurring side by side."
Though not every firm is taking the sector plunge, a majority seem to be embracing it. Each of these firms is going about it slightly differently, but the essential goal is the same: to get traders talking to one another so they can better accommodate the boom in global investing by fund managers and other institutions.
Credit Suisse, for example, started a pilot program two months ago to put all its listed, OTC and international technology/telecom traders together.
"We're really convinced customers will manage money in a more global way," said Michael Clark, head of equity trading. "If technology is moving in Germany, there is no reason to believe it won't move in the U.K. or the U.S."
The firm is considering the same trading pilot program for metals, energy, financials and pharmaceuticals.
In the past, says a Goldman Sachs insider, a firm's designated trader for Apple Computer Inc., an over-the-counter issue, might have a seat about 40 feet away from the trader for Compaq Computer Corp, a listed stock.
Both companies are makers of personal computers, so their stocks would likely move in tandem, the insider explains.
The traders, from their relatively distant perches, would have had to shout or call to each other, or, what is more likely, wouldn't have talked at all, he said. Goldman has already made the switch to sector trading, he said. A spokeswoman for the firm did not return calls.
Derivatives Expertise
Use of derivatives by buy-side institutions is also on the rise, especially so amid recent stock market volatility, traders said. Firms are seeking to bring greater derivatives expertise to the block trading desk.
At Salomon, a plan to integrate the block trading and derivatives desks is under way, said Ciaran O'Kelly, head of block trading at the firm.
Part of the integration involves joint pitches to institutions, which may be looking to use derivatives to either enhance liquidity or minimize the risk of holding certain stock positions. For example, a portfolio manager might hold an individual position that has outsized the market in the underlying stock, O'Kelly said.
"Integrating the derivative and block trading departments will enable us to be more informed, insightful and real-time and, ultimately, this will prove to be value-added to our clients," O'Kelly said.
Another reason derivatives use is up, according to traders: More and more employees with substantial holdings in company stock have been made wealthy, and are looking to sell their shares without taking a tax hit. To do so, they enter into derivatives contracts that allow them to effectively sell the stock, gain the proceeds and defer taxes for a specific number of years.
"Most equity traders don't come close to understanding how that impacts the market," Credit Suisse's Clark said.
To bring derivatives expertise to its block trading operation, CSFB has been holding mandatory continuing education for traders during the past year.
In addition, the firm is recruiting new talent to its block trading desk with an eye toward hiring people who have diverse trading experience, Clark said.
The head trader of another firm agreed, and noted that the lack of liquidity in today's market is making integration between block trading and derivatives a necessity.
"The desks need a little retooling," he said, adding that his firm will embark on joint training between block trading and options traders. He describes the operation he runs as "young."
"They're bright, but they need a little integrating with options," he said.
There are some cons to reshuffling traders, and not every firm is embracing it. Morgan Stanley Dean Witter & Co. and Donaldson, Lufkin & Jenrette have separate desks for listed and OTC trading. Within those arenas, traders are seated together by industry sector.
Regular Meetings
Morgan Stanley has opted to retain separate desks and instead hold regular meetings. "The difficulty with making physical changes to the desk is that it gets cumbersome to get natural players together," Olesky said. It may be advantageous, for example, to keep certain derivatives traders together regardless of sector, he added.
Clark noted that Credit Suisse's pilot program may not make sense for all sectors. He cited utilities as a sector in which companies around the world operate under very different regulatory frameworks. Their stocks' performance then is not as aligned as in other global sectors, he said.
