Securities and Exchange Commission officials say that market makers should be permitted to charge customers for the cost of accessing electronic communications networks (ECNs).

SEC Commissioner Laura Unger told the annual Washington conference of the Security Traders Association that market makers probably should be allowed to charge a "reasonable fee" for access, according to published reports.

Unger's views do not necessarily represent current SEC policy, and are her own personal opinion, she said.

Unfair

Market makers view the current arrangements with ECNs as unfair.

A trading desk typically pays an ECN a penny a share for an execution. But market makers are not allowed to charge ECNs for hiting their bids or taking their offers.

The NASD's agency-quote proposal allows market makers to operate like ECNs and charge fees to customers whenever they execute their limit orders posted on Nasdaq as agency quotes.

But some market makers view the NASD proposal as far too complex.

Incorporate

Robert Colby, deputy director of the SEC's division of market regulation, who was also a speaker at the same conference, agreed that ECN access fees should be incorporated into the quote for a stock.

But practically speaking, Colby felt that market makers would have to wait until the switch to a decimal-based trading system before that could be accomplished.

Unger later said that it would be perfect timing to permit market makers to start charging access fees at the same time as the switch to trading stocks in decimal increments.

The move to decimals is scheduled to happen in mid-2000.

Small technology companies suddenly have several new investment banks eyeing them for underwriting and other deals.

Some even know the value of the Internet, the sharpest technology on Wall Street. The hottest of these investment banks with an Internet edge is perhaps e-syndicate pioneer Wit Capital Group.

The New York-based company announced last month it is planning to complete an initial public offering in the second quarter. In addition to underwritings and offering individual investors access to IPOs, Wit Capital sponsors secondary offerings, private placements and venture-capital deals.

While Wit Capital will face increasing competition as the Internet eventually becomes a more popular tool in allowing individual investors to buy shares in an IPO, the company had a headstart over rivals.

Launched in 1997, Wit Capital was the first to achieve fame as a so-called e-manager, using the Internet to co-manage stock underwritings. In 1996, company founder Andrew Klein conducted an online IPO for shares in his Spring Street Brewing.

More recently, Wit Capital participated in the January IPO of MarketWatch.com (Nasdaq:MKTW). The company, a financial-news provider, soared in price to $130 a share in its first day of trading, finishing with an opening-day gain of 473.53 percent.

Wit Capital's planned IPO comes as several new outfits are forming, each targeting the capital needs of small-scale technology companies.

At the helm of these investment banks are some big-time Wall Street executives: William Hambrecht, co-founder of San Francisco's Hambrecht & Quist, Walter Cruttenden, founder of Cruttenden Roth in Irvine, Calif., and Thomas Weisel, founder of San Francisco-based Montgomery Securities (now part of NationsBanc Montgomery Securities).

By their own admission, the new firms are targeting small technology companies they believe are being neglected by the California-based investment banks that still bear their names.

For much the same reason, some market sources believe that Wit Capital's own offering led by Bear Stearns & Co., may be well received.

"Wit is likely to offer 15 percent of the firm," said Tom Taulli, a Newport Beach, Calif.-based research director for Silicon Investor, in an interview several weeks before the Wit Capital IPO was announced. "This is probably the right time to strike because brokerage stocks are red hot. The number of online trading accounts continues to increase at record levels."

W.R. Hambrecht, the new company founded by Hambrecht, recently unveiled plans to offer IPOs directly on the Internet through an auction process. This is a departure for equity issuance, since the highest bidders get the stock first in an auction.

Building upon the brand name of Palo Alto, Calif.-based E*Trade, Cruttenden recently joined his forces with the online discounter to launch E*Offering.

E*Offering is an investment bank that plans to sell stock online to individual investors. Based in Newport Beach, E*Trade owns 28 percent of E*Offering. Sandy Robertson, founder and former chief executive of San Francisco-based Robertson Stephens (now part of BancBoston Roberston Stephens) is also an investor.

The outfit plans to float a new class of electronic services, including distribution of up to 50 percent of every IPO to retail investors online.

"We have lined up 30 companies that will sell shares to investors via the Internet," said Len Purkis, E*Offering's chief financial officer, in a February 10 press conference.

Wit Capital has come a long way since its founding by Klein, a former securities attorney with Cravath Swaine & Moore, and the firm's current chief strategist. Having pioneered online IPOs, Klein was not above rattling some cages.

At several stops, he railed against Nasdaq market makers for allegedly keeping spreads artificially wide. Similarly, he protested that it was unfair that individual investors were shut out of IPOs by the sheer power of the institutional community.

Adding an image of credibility to the firm's operations was the hiring last spring of Robert Lessin as chairman and chief executive. The former head of investment banking at Salomon Smith Barney in New York, Lessin is considered by many to be one of the top angel investors on the East Coast.

by Jeffrey R. Hirschkorn

Small technology companies suddenly have several new investment banks eyeing them for underwriting and other deals.

Some even know the value of the Internet, the sharpest technology on Wall Street. The hottest of these investment banks with an Internet edge is perhaps e-syndicate pioneer Wit Capital Group.

The New York-based company announced last month it is planning to complete an initial public offering in the second quarter. In addition to underwritings and offering individual investors access to IPOs, Wit Capital sponsors secondary offerings, private placements and venture-capital deals.

While Wit Capital will face increasing competition as the Internet eventually becomes a more popular tool in allowing individual investors to buy shares in an IPO, the company had a headstart over rivals.

Launched in 1997, Wit Capital was the first to achieve fame as a so-called e-manager, using the Internet to co-manage stock underwritings. In 1996, company founder Andrew Klein conducted an online IPO for shares in his Spring Street Brewing.

More recently, Wit Capital participated in the January IPO of MarketWatch.com (Nasdaq:MKTW). The company, a financial-news provider, soared in price to $130 a share in its first day of trading, finishing with an opening-day gain of 473.53 percent.

Wit Capital's planned IPO comes as several new outfits are forming, each targeting the capital needs of small-scale technology companies.

At the helm of these investment banks are some big-time Wall Street executives: William Hambrecht, co-founder of San Francisco's Hambrecht & Quist, Walter Cruttenden, founder of Cruttenden Roth in Irvine, Calif., and Thomas Weisel, founder of San Francisco-based Montgomery Securities (now part of NationsBanc Montgomery Securities).

By their own admission, the new firms are targeting small technology companies they believe are being neglected by the California-based investment banks that still bear their names.

For much the same reason, some market sources believe that Wit Capital's own offering led by Bear Stearns & Co., may be well received.

"Wit is likely to offer 15 percent of the firm," said Tom Taulli, a Newport Beach, Calif.-based research director for Silicon Investor, in an interview several weeks before the Wit Capital IPO was announced. "This is probably the right time to strike because brokerage stocks are red hot. The number of online trading accounts continues to increase at record levels."

W.R. Hambrecht, the new company founded by Hambrecht, recently unveiled plans to offer IPOs directly on the Internet through an auction process. This is a departure for equity issuance, since the highest bidders get the stock first in an auction.

Building upon the brand name of Palo Alto, Calif.-based E*Trade, Cruttenden recently joined his forces with the online discounter to launch E*Offering.

E*Offering is an investment bank that plans to sell stock online to individual investors. Based in Newport Beach, E*Trade owns 28 percent of E*Offering. Sandy Robertson, founder and former chief executive of San Francisco-based Robertson Stephens (now part of BancBoston Roberston Stephens) is also an investor.

The outfit plans to float a new class of electronic services, including distribution of up to 50 percent of every IPO to retail investors online.

"We have lined up 30 companies that will sell shares to investors via the Internet," said Len Purkis, E*Offering's chief financial officer, in a February 10 press conference.

Wit Capital has come a long way since its founding by Klein, a former securities attorney with Cravath Swaine & Moore, and the firm's current chief strategist. Having pioneered online IPOs, Klein was not above rattling some cages.

At several stops, he railed against Nasdaq market makers for allegedly keeping spreads artificially wide. Similarly, he protested that it was unfair that individual investors were shut out of IPOs by the sheer power of the institutional community.

Adding an image of credibility to the firm's operations was the hiring last spring of Robert Lessin as chairman and chief executive. The former head of investment banking at Salomon Smith Barney in New York, Lessin is considered by many to be one of the top angel investors on the East Coast.

Another notch in Wit Capital's belt was the recent hiring of Jonathan Cohen, one of the widely-respected Internet analysts at brokerage giant Merrill Lynch & Co. He is Wit Capital's new director of research.

"Wit is providing a new link to the chain and letting individual investors get in on the action," Taulli said. "With Wit Capital getting involved in many of the high-powered new issues, they have helped pump the massive returns seen by some of the new entrants."

For individuals looking to profit from one of the IPO market's next blockbuster offerings, Wit Capital's e-syndication program may be the ticket.

The program requires a minimum balance of $1,000 in a Wit Capital brokerage account. This investment alternative enhances the chance of an individual investor getting in at the offering price, experts say.

By contrast, while New York-based Donaldson, Lufkin & Jenrette's DLJdirect offers a similar IPO program, clients who want access must maintain a minimum balance of $100,000.

To enroll in IPOs where Wit Capital is a participant: browse Wit Capital's interactive web site, complete an investor profile, download a preliminary prospectus on the IPO from the site, and place an "indication of interest" for the IPO.

In order to ascertain customer loyalty, shares are allocated on a first-come, first-serve basis, and based on a client's investment principles and trading background.

The table on the previous page illustrates the ten most recent offerings that Wit Capital has participated in. Through February 15, the average offering skyrocketed 166.29 percent. Excluding IPOs from Michigan Community Bancorp (Nasdaq:MCBP) and Corinthian Colleges (Nasdaq:COCO), the other eight have one major thread in common: Internet mania.

Wit Capital has set important guidelines on flipping. The firm's investing literature, displayed conveniently on its web site, notes: "Members who have track records for buying public-offering shares and holding them for at least 60 days will have priority over members who do not have such records." Therefore, Wit Capital could penalize flippers by reducing their likelihood of obtaining shares in future allotments.

On the Horizon

Analysts feel that if conditions in the IPO market continue to be strong, there is no doubt that Wit Capital will hit the markets with a solid IPO. "By building a brand name for itself in the equity-underwriting area, Wit's huge infrastructure is enabling it to put together a heady track record for the IPOs it is involved in," one analyst noted.

Tim Heekin was still running the global equity-trading desk last September in London for Salomon Smith Barney when his telephone rang. The caller needed no introduction. He was Thomas Weisel, legendary founder of Montgomery Securities, once among the largest and most lucrative securities firms on the West Coast.

In 1997, Weisel sold his firm to Charlotte-based NationsBanc for about $1.3 billion, making him a tycoon as well as a serious philanthropist on the San Francisco Bay-area scene.

Weisel, however, wasn't exactly happy. He had recently quit as chairman of newly-named NationsBanc Montgomery Securities, having lost control of the business to NationsBanc's tough-talking chief executive, Hugh McColl. McColl, an ex-marine had masterminded the BankAmerica buyout.

Weisel is also tough. A former bicycle and ski racer with an athletic frame, his deal-making skills seem straight out of a textbook. In that respect, the symmetry between Weisel and Heekin stands out. Heekin is an avid skier and a mountain biker, as well as a well-respected dealer on the trading floor.

Crestfallen

At first crestfallen about losing control at Nationsbanc Montgomery, the 57-year-old Weisel soon put the memory behind him. He was determined, in the words of one person, to exact revenge on NationsBanc Montgomery, though he has publicly dismissed the assertion.

Weisel quickly plotted a plan for his return to the big league cloak-and-dagger world of West Coast brokerage.

The plan: to jumpstart a research-driven merchant bank in San Francisco, providing investment banking, institutional brokerage and private equity to the growth companies he believed bulge-bracket firms were ignoring. His primary goal was to repeat the success of his old Montgomery Securities in institutional brokerage and investment banking.

So Weisel's call to Heekin last September carried a sense of urgency. The call was one of hundreds Weisel would make over several weeks in a personal campaign for star pros at his new firm.

By the time Weisel had called Heekin, both their worlds were topsy-turvey. Heekin was interviewing for another job, his 18-month sojourn in London facing disruption. Under an employee-reduction plan, Heekin and other staffers on the Salomon side of his firm were getting pink slips. Heekin, meanwhile, was mulling several offers. Weisel's offer tempted him the most.

"When I got the call from Tom last September, it was perfect timing," said Heekin, a strapping 42-year-old trading veteran who once taught math at a private school in New Jersey. "I wanted to get back to the U.S. markets. When I heard Tom's business plan and the people he had assembled, the decision for me to move to San Francisco became very easy."

So Heekin soon packed his bags and flew home to the U.S. to join the new firm's trading desk, launched on February 1. He has been living in San Francisco ever since, working at Weisel's new firm, Thomas Weisel Partners, based in the Pacific Telesis Towers. And he is running the equity-trading and sales-trading desk, which is staffed by eight market makers,12 sales people and counting.

Enthusiasm

The former Salomon Smith Barney pro sounded enthusiastic in an interview with Traders Magazine, talking at length about the small to large-cap growth companies that the desk is covering in technology, consumer media and telecommunications, healthcare, and business and financial services.

In the background a construction crew was busy hammering a trading floor into shape.

"I think the future of the economy is going to be dictated by the stretch of highway 40 miles south of San Francisco. That stretch follows the Silicon Valley," said Heekin. "It covers all of these tech and Internet companies that are going to be driving the economy in 2000."

Thomas Weisel Partners projects $100 million in revenue in 12 months, rising to $500 million in its fifth year. The firm is capitalized with $65 million, about half from partners, the rest from outside investors. An additional $20 million of capital generated by partners is pending.

The first round of financing for a private-equity fund is expected to raise $500 million, which will be used to buy equity stakes in young companies before they go public, somewhere between the venture capital and IPO stages.

Heekin's enthusiasm can't be attributed to the base-compensation arrangements at Thomas Weisel Partners, which are said to be frugal by Wall Street standards. However, Heekin is one of 59 partners, meaning his overall compensation is tied to the success of the merchant bank. Compensation aside, personal loyalty to Weisel is not in short supply.

Weisel seemingly had it somewhat easier than normally would be expected for a start up, recruiting half of the 200 or so staffers from his old digs. Some traders watching the exodus from afar likened the departures to a rebellion.

After NationsBanc Montgomery paid year-end bonuses last December, Weisel revved up his recruitment drive at the firm, luring a slate of equity sales traders, position traders and equity analysts.

Weisel signed sales traders Dan Charney, Bill Falk, Rich Gimigliano, Geoff Heyman and Peter Stovell; listed traders Lou Commesso, Tom Schnurr, Adam Tracy and Weisel's son, Wyatt; over-the-counter traders Peter Gephardt, Mike Meitus, Brian Duggan and Kevin Blair; New York Stock Exchange floor representative Kevin Robinson; and international trader Charlie Doering.

Among the top executives who jumped from NationsBanc Montgomery to Thomas Weisel Partners are Frank Dunlevy and J. Sanford Miller, who are the co-heads of investment banking. Weisel also hired from other firms, recruiting pros in sales from BancBoston Robertson Stephens, BT Alex. Brown & Sons and Bear, Stearns & Co.

NationsBanc Montgomery insiders laughed at Weisel's seeming obsession with hiring its staff, saying it was designed in part as a public-relations gimmick by Amanda Duckworth. Duckworth is the polished partner at Thomas Weisel Partners who, until recently, handled public relations at NationsBanc Montgomery.

Realistic

Realistically, Thomas Weisel Partners hired about 48 officers from NationsBanc Montgomery. The rest were employed as secretaries and in other lower-level jobs, and one was the facilities manager, insiders claim. "They even hired the cleaning lady to inflate the number," one insider said.

"NationsBanc Montgomery has decided it is going to win in the marketplace with the power of BankAmerica's capital behind us," the insider added. "We're not going to compete with mountains of daily press releases like Weisel Partners."

Showing battle scars, NationsBanc Montgomery started legal action against nine of the pros who boarded Weisel's bandwagon, claiming, among other things, that they had violated confidentiality agreements and misused sensitive corporate-finance information. There are currently four lawsuits pending.

For its part, no doubt tongue in cheek, Weisel has described the lawsuits as frivolous, noting how pros were free to leave with impunity under his reign at Montgomery Securities.

Scott Kovalik, director of equity trading at NationsBanc Montgomery, said he was personally disappointed to see talent bolt from his desk. Still, he said the defections were not a blow.

"We have been able to maintain and grow our business," he said. "While I am disappointed to see some talented people leave, we have been adding very capable people of our own."

Weisel said some of his recruitment success resulted from disenchantment felt by pros working at firms that have merged, becoming behemoths and drifting far from their original missions.

Many of the newly-acquired brokerage firms are shifting their focus to larger, more established corporations served by their bank parents.

Said Heekin: "There is a lot of dislocation and a lot of people who are unhappy in their current state. Their culture has gotten very diluted. There is a lack of leadership and direction at a lot of Wall Street firms right now."

This same dislocation is what's partly driving Thomas Weisel Partners' growth plans. The merchant bank sees itself competing with investment-banking giants Morgan Stanley, Dean Witter & Co. and Goldman, Sachs & Co. in the growth sectors. Weisel excluded his old firm, saying it has refocused on other sectors.

New Focus

NationsBanc Montgomery, which is expected to change its name as soon as its BankAmerica parent completes the reorganization of the unit, is shifting its focus from a firm concentrating on trading and advising young companies, to a full-service investment bank with muscle in large equity, debt and currency operations. It recently launched a program-trading operation headed by Michael Stewart, who joined the firm eight months ago from Barclays Global Investors in San Francisco, where he was head trader.

"The number of very specialized boutiques that used to be very strong in the growth area have become disabled," Heekin said.

"If you will, they have taken their eyes off the ball because of merger activity," he added. "There is a real need for a high-powered dream team of people focused on these companies."

Freewheeling West Coast

With willing recruits and overarching ambitions, Weisel's new merchant bank could be a boisterous outfit on the freewheeling West Coast. The business is equally split among institutional brokerage, equity issuance and merger-and-acquisition activity. The firm has a seat on the New York Stock Exchange.

The distinction between an investment bank and a merchant bank is an important reminder of how Thomas Weisel Partners works. An investment bank uses outside capital raised in the public or private markets, acting as agent in customer deals. A merchant bank, on the other hand, uses its own capital, acting as principal, to fund a customer's activities.

"Thomas Weisel likes to look at our firm as a combination Blackstone Group, a Lazard Freres & Co. and a slimmed-down Montgomery Securities," Heekin said.

About two dozen underwriting deals are in the works, with more than half of them IPOs. While the merchant bank projects huge growth, some competitors say that could be a long time coming. The firms limited capital, for example, would preclude it from participating in more than a few deals simultaneously.

Heekin compares the business matrix to a four-legged chair, with the four legs being research, investment banking, equity sales and trading.

The equity-trading desk is there to dominate trading in the growth stocks covered by the firm's research people.

"The research analyst is the quarterback of the firm," Heekin explained.

"Our desk is going to have timely, on-the-spot market intelligence about the companies we follow," he added. "That's a great advantage to have as we service our institutional buy-side clients. We only cover stocks we have research on."

The research effort, comprising 14 senior analysts led by Ned Zachar, serves some 200 institutions. These institutions so far pay straight commissions. No soft dollars are currently involved. The firm said it hopes to start delivering research to customers via the Internet in May.

Stocks

At the moment, the desk is covering 93 Nasdaq stocks. The number is projected to nearly double before summer. On the listed side it is covering some 60 names, a number which is also expected to double. Heekin said share volume and equity issuance are tilted in favor of Nasdaq issues.

"Trading must work to actively support investment-banking clients and be an effective trader of each company's stock," Heekin said.

In the period February 1 through late March, Heekin's desk ranked 62nd among market makers, with average daily volume of about 1.5 million shares, according to the AutEx Group's BlockDATA rankings. On the listed side, his desk was ranked 64th, with average daily share volume of 920,000 shares. Of that volume, 14 percent of the trades were crossed.

Heekin said there are three things he keeps in mind trading stocks on the desk: the fundamentals of the company, technical analysis of the stocks and the supply and demand in the stocks.

"With the companies we bring public or do secondary offerings for, we will have a good sense of where the institutions either want to buy the stock or where they are looking to lighten their positions," he said.

As the hammers were heard clattering away in the background, Heekin later remarked that Thomas Weisel laid out his business plan when the global equity markets were in danger of blowing up. "But we are not worried about that," he said. "This is a very strong and well-diversified firm, and it shows."

Four years ago, a large equity holding at Nicholas Applegate Capital Management was 250,000 shares. In 1995, the San Diego money manager had $13.3 billion in assets under management.

Today, Nicholas Applegate has $32 billion in assets, while large positions, or core equity holdings, easily exceed a million shares.

At institutional giants, like Boston-based Fidelity Investments, core holdings regularly reach 90 million shares in a single stock.

With growing assets, money managers are forced to hold larger positions, and many institutional trading desks are having to abandon their traditional price goals in the struggle to find sufficient liquidity to execute orders.

"Liquidity is the biggest problem in the marketplace," said Jamie Atwell, head of equity trading at Nicholas Applegate. "The size of positions have gotten so large. This hasn't been offset by an increase in outstanding shares. I'm willing to sell up or down a little to get an extra 100,000 shares."

In 1993, 20 percent of quarterly trading volume at large money managers was comprised of trades in excess of 250,000 shares, according to a survey by The Plexus Group, a Los Angeles-based consultant on institutional trading costs.

Today, trades of a quarter-million shares or more comprise some 75 percent of total trading volume for those managers.

Last year there were some 6,000 trades of one-million-share blocks in U.S. listed stocks, according to the AutEx Group, a Boston-based provider of block-trading information.

The growth in positions can be attributed to the boom in institutional assets. In January, the total assets of U.S. mutual funds were $5.72 trillion. Overall, investors pumped $12.96 trillion into U.S. equities by the end of 1997, up from $6.24 trillion at the end of 1994.

Atwell said the enormous size of institutional orders has made it more difficult to get in or out of positions. And with increasing volatility in the U.S. markets, institutional traders try to execute large orders before prices swing out of favor.

"I absolutely have to look for liquidity over price," said Maureen Yeazel, head equity trader at Harbor Capital Management Co. in Boston. "You don't try to save an eighth when the markets are moving quickly. If stocks are going down, you try to save a half or a point. It's silly to work every eighth when the markets are really volatile."

Yeazel, whose firm has more than $6.2 billion in assets under management, said that until recently, she could be more patient handling an order. But, over the last year, volatility has forced her firm to get in and out of positions more quickly.

"You don't know when trends will turn, and the trends turn so quickly. You have to be quick or you can lose a lot," she said.

Looking primarily for liquidity creates greater volatility, Yeazel added, as the markets react to the execution of large orders.

Varying Strategies

Of course not all institutional desks trade the same way. Although still concerned with liquidity, some money managers are unwilling to depart from investment strategies for liquidity.

"Liquidity is a bigger concern than it used to be, but it doesn't necessarily dictate how we trade," said Carrie C. Canter, head equity trader at Barrow, Hanley, Mewhinney & Strauss, a Dallas money manager. "It really depends on the type of manager. A growth manager and a hedge fund look more for liquidity. A value manager will pay what they think is appropriate."

Traders such as Richie Fink strive to be price-conscious with an order. Fink is the head trader at U.S. Steel and Carnegie Pension Fund in New York, a conservative value manager with $11.5 billion in assets.

"My job is to get it done, in a day, a few days, or a week," he said. "We're not as concerned with liquidity. We're not as trading-oriented. I won't sell down to get a print."

Barrow Hanley is also a value manager, handling $36 billion in assets across 160 accounts. The firm owns just 40 stocks, so positions are extremely large. Canter said her firm is usually unwilling to pay up or down for liquidity, and instead has to be more patient with orders. She rarely uses broker capital to execute an order.

Canter said that broker dealers aren't committing the capital necessary to take the other side of block trades a common complaint among buy-side traders which adds to liquidity problems.

"Firms don't have the capital we need," she said. "If we have a position of 50 million shares, the capital for 250,000 from a broker does us no good. It's not worth the risk for the sellside to put up liquidity for six cents a share."

Wayne Wagner, president of the Plexus Group, blames smaller trading increments for the reduction in capital commitments from the sellside. "It raised costs for institutional investors because not as much money is being made in the middle on the sellside," he said.

Close Communication

To find the balance between price goals and liquidity issues, a trading desk has to stay in close communication with its portfolio managers.

"Interaction between portfolio managers and buy-side traders continues to strengthen," Nicholas Applegate's Atwell said. "It used to be a hands-off process. Now the desk and the managers work together. There's more understanding what the other side is trying to accomplish. When there's more information, the better we do on the desk."

Darcy MacLaren, a portfolio manager at Seattle's Safeco Asset Management Co., always reminds her trading desk what she is trying to accomplish with an order.

"We're price-sensitive, and we have low turnover, so liquidity is not as big an issue," she said. "Sometimes I'm very set on a price, or sometimes I give the desk a range of prices. The desk can be my eyes and ears to the market, and our interaction helps each order get done correctly."

But MacLaren said how trades are handled varies from ticket to ticket.

"It depends on a lot of things, whether you're dealing in a large-cap stock or a small-cap stock," she said. "With a large-cap stock, liquidity is not as much of a problem."

Traders also handle orders differently if they are establishing or liquidating a large position, or just rebalancing accounts.

"When we're building a position, we're less price-sensitive initially," said Michael Murphy, head trader at Freemont Investment Advisors in New York. "There's a reason you're buying that stock that day. You don't want to miss something."

But when a position is already established, Murphy said the desk can be less concerned with price because the established position offers some protection. "It really depends on what you're buying or selling," he added. "Stocks can be driven by events, analyst projections. It really depends on the situation how you trade a particular stock."

Market Function

But despite varying strategies, tightening liquidity remains a problem for many traders.

"Prices could be right in the market, and I still can't buy a stock there," said Yeazel of Harbor Capital. "It doesn't matter if you're great at picking a price. You need the liquidity to fill the order."

Yeazel said that buy-side traders will continue to make the search for liquidity a primary goal, as long as institutional assets and positions continue to grow.

"It's not necessarily bad," she added. "It's just a factor of the markets. You have to do what's best for the firm on the desk. That's the value the desk adds. Going for bigger bets and finding liquidity."

How many electronic communications networks (ECNs) can the equity markets support? By the sound of some Nasdaq and institutional traders, the answer is very few.

"The Securities and Exchange Commission has spawned a mini-cottage industry," complained Nick Karos, managing director of Nasdaq trading at U.S. Bancorp Piper Jaffray in Minneapolis. "The problems with them can only get worse."

The problems that Karos was referring to are an eclectic mixture of dizzying price-quote traffic, liquidity, anonymity and other concerns on the nine ECNs approved so far by the SEC.

A new twist occured when the National Association of Securities Dealers sent its agency-quote proposal to the SEC for approval. If implemented, the rule would empower market makers to run what, in effect, are their own ECNs.

As currently envisioned, the rule would allow market makers to post customer limit orders anonymously, using an agency acronym separate from the market makers' proprietary quotes.

But such a prospect raises the blood pressure of some traders.

"On an average stressful day, Nasdaq cannot handle traffic," said Arthur Pacheco, president of STRIKE Technologies, operator of a consortium-owned ECN based in New York.

Some trading professionals echoed Pacheco, noting that Nasdaq's computers are so strained that some trade confirmations are not transmitted fast enough. Nasdaq is currently adding more bandwidth to its network.

Although he is hardly an impartial observer, Pachecho noted: "If you add the agency-quotation ability to all the market makers, there is a potential to at least double messaging traffic. And that's only the tip of the iceberg."

"Capacity is definitely an issue," agreed James Marks, electronic commerce analyst at Deutsche Bank Securities in New York.

U.S. Bancorp's Karos added that the agency-quote proposal makes no sense. "We need less pieces of the puzzle. The more there are, the more ways to break," he said.

Still, Karos is more concerned at the moment about what it is costing him to use ECNs.

"Everytime I have to access [an ECN's] quote I have to pay the ECN a fee. Every time an ECN has to access my quote, I can't charge it anything," Karos explained. "What the SEC has created is an unlevel playing field."

Sometimes, market makers are forced to access an ECN when it alone is at the inside market, especially in high-volume technology stocks.

The individual investor ultimately pays for the service because the access fee becomes a cost of conducting business, a cost incorporated by a trading desk in its fee structure, traders say.

"The way it should work is this: If you are a member of an ECN, you alone should pay for the use of the ECN," Karos said.

For its part, the NASD contends that the agency-quote proposal will actually level the playing field for Nasdaq market makers that feel stiffed by ECNs.

"One issue market makers wanted [resolved] was the ability to charge on their agency orders the same way an ECN can do now," said Alfred Berkeley, president of Nasdaq. "The agency quote lets them do that."

In any event, in today's rapidly-changing market structure, other plans could supersede or alter the final design of the agency-quote proposal.

One possibility is that Nasdaq will join forces with an established ECN, such as Reuters Holdings' Instinet. Instinet has had well-publicized talks with both Nasdaq and the New York Stock Exchange about forging links.

Integrated Markets

While the SEC's order handling rules ostensibly promote price transparency on customer limit orders, as well as the public exposure of superior price quotes from ECNs, the growth of ECNs makes the task difficult.

As originally conceived, ECNs served a singular purpose: to allow institutions to trade anonymously outside the regular trading day on Nasdaq and the NYSE. Now ECNs a term coined by regulators do much more: They carry price-quote data onto Nasdaq via SelectNet.

Today, the proliferation of ECNs is hurting small and mid-sized trading institutions, some buy-side traders grumble. What's more, some discount the anonymity factor.

Ray Murray, head of equity trading at Investment Advisors in Minneapolis, attributes this to the sheer abundance of ECNs which makes it difficult to monitor them effectively as well as to the obvious fact that an ECN may not always have the other side on a trade.

"I end up giving an order to a broker, so there goes anonymity," he said.

"ECNS have hurt liquidity, split up where everybody goes and fragmented markets," added Gail Kummer, vice president of trading at Murray's cross-town rival Winslow Capital.

Moreover, the dearth of ECNs sometimes gives the illusion that there are more sellers in a stock than there really are. For example, an institution could break up an order among a broker and several ECNs. While the market indicates several sellers in the shares of stock, there really is only one seller.

Some traders say it is only possible to monitor a small handful of ECNs for price-quote data.

"To accurately represent ourselves on all these systems, we would need to increase our staffing a lot," Murray said. "But we can't staff so many machines. It would look like the Johnson Space Center."

Nevertheless, some market veterans disagree. What has happened, they contend, is this: The order handling rules have transferred some of the liquidity-sourcing function, previously the stranglehold of the sell-side dealers, to their buy-side customers.

The SEC declined to comment for this story.

Time Consuming

Most institutional traders have access to Nasdaq Level 11 screens showing the inside market on all ECNs. For a more full look at each book, a time-consuming exercise, a desk would need to run separate applications from each ECN.

"Institutions have taken back some of the trading functions previously done by market makers," explained one market veteran, who declined to be named. "The institutions use to pay dealers to find liquidity. Now the institutions are grumbling because they are busier."

STRIKE's Pachecho said that while liquidity concerns are valid, having access to price quotes is not an issue.

"Prices have to be shown on the Nasdaq [price-quote montage]," he said. "On liquidity, the disconnect could exist for a while. What a non-ECN member will miss is the level of buyers and sellers in descending order, which is valuable information."

Indeed, Winslow Capital's Kummer explains that a customer unable to finish the order on an ECN may go to a market maker expecting the market maker to commit capital just after the customer cleaned out the real buyers and sellers.

The market maker, she says, will not be willing to commit as much capital because the market maker could get hurt. "Now that kind of situation would affect liquidity," she said.

However, some dismiss the notion that market makers provide liquidity.

"A market maker is like a used-car dealer," said Junius Peake, professor of finance at the University of Northern Colorado. "A market maker provides immediacy, and that's micro-liquidity."

"If I want to sell shares right now at the best price available and nobody else buys it, the market maker will," he added, "obviously with expectations of reselling it at a higher price, like a used-car dealer."

Peake contends that it is the customer who creates liquidity. "In the long-run, the market will only be made efficient when all bids and offers in the same security can interact," he said.

Agency-Quote Proposal

Meanwhile, as the NASD waits for SEC approval for its agency-quote proposal, some traders are nervous about what's ahead. The public comment period ended April 1.

STRIKE's Pacheco says that market makers should be given incentives to drive markets through proprietary quotes.

"Displaying an order for which you are already getting a commission from somebody else is not relevant," Pacheco said.

Nasdaq's Berkeley argues that the agency-quote proposal is fair and mends a fragmented market.

"It actually brings the markets together and mutualizes the ECN function, doesn't it?" he said. "The whole idea is not to fragment the market, and to let each market participant have the same level playing field as the others."

Eyeing a business opportunity, the AutEx Group, the Boston-based provider of block-trading data, says it is consolidating ECN price-quote data in its product, and it hopes to allow traders to route orders to ECNs.

A separate part of the same SEC agency-quote filing calls for folding SOES and SelectNet into one system. Once again, some trading professionals are concerned about Nasdaq's capacity to handle the potential spike in traffic.

"The problem with that proposal is that automatic execution takes place on Nasdaq's terminal," Pachecho said. "That could create inefficiencies."

Some traders point out that ECNs and market makers have their own internal trading systems and limit-order books. These players can measure effectively who's first with a trade and who's entitled to an execution.

However, if that function is handed over to the NASD, ECNs, for one, will no longer be able to operate efficiently, some traders say.

That's because they would not be able to easily ascertain whether they are about to receive an execution from the NASD's terminal. In that case, they could no longer give automatic electronic executions within their own systems.

"This in no way will be an integrated system. The intentions may be good, but as for the implementation? Well, it's lousy," Pacheco said.

Other Problems

More problems are predicted if the agency-quote filing is enacted. Market openings and closings could be catastrophic, some traders say. For another thing, it is not clear how the Nasdaq Manning Rule obligations would be integrated into the plan.

The proposed changes potentially create situations where terms and considerations of customer orders could be violated inadvertently by market makers trying to comply with Manning Rules.

"It this goes through, it will be classic case of the SEC trying to solve one problem by creating another," Peake scoffed.

The SEC declined to comment for this story.

To the casual observer, the recent machinations in the transaction-services industry could lead one to ask the question: Where are we going and how do we hope to get there?

We've seen electronic communications networks (ECNs) become pseudo-exchanges and market centers. We've seen exchanges announce mergers and then call them off. We've seen the National Association of Securities Dealers take over a listed exchange to offer, in its own words, the best of both worlds. And we've seen just an announcement of an electronic option exchange, (the International Securities Exchange, or ISE) to be launched next year, serve as a catalyst to cut rates almost in half on the current options exchanges.

The granddaddy of them all came when the New York Stock Exchange announced that it might want a piece of its turf to look like Nasdaq, or an ECN, or maybe both.

The Momentum

If you ask the question as to what is driving this momentum, the answer always comes back to technology. Truth is, technology is only a road, an avenue, not an ultimate destination. We are striking out in all these directions because no one has a grand design and everyone believes in the old adage that movement is progress, even if we know not the ultimate objective.

It's about time that we begin to determine what we want this marketplace to look like, rather that become the unwilling victims of chance. That course may not get us where we want to go. If we think that what is going on right now will lead to the best of all worlds for every participant, then that's fine. But let's try to insure that there is no rude awakening at the end of this road.

I have always been a laissez-faire person who believes that competition will produce great results. But certain venues require minimum levels of acceptance and credibility before we ascend to the next stop. Our securities markets, tested over two centuries and the envy of the rest of the world, are such places.

Let anyone tell me that unrestrained competition has produced a better class of service in the airline industry in the 1990s. We've turned most of them into facsimiles of the cross-country buses of another era. Hardly the result imagined when we began the trip.

Moratorium

It's time to step back, assess the capabilities of what we have and what we might create. Possibly, have the regulators declare a short moratorium period. After all, they did that about 20 years ago when the first options exchanges were being launched one right after another. Then proceed ahead with a game plan created by all participants.

The Security Traders Association, along with the Securities Industry Association, the NASD and the NYSE, as well as the other stock exchanges, could bring the elements of the new marketplace together and work out a blueprint that continues, without risk of interruption, the capital-raising processing of the markets. That is the true strength of our system, and it has been of unique benefit to companies and investors alike. Why not give logic a chance?

We have a great opportunity to create change and be the master of this change. To have it any other way would be unfair to investors in the new millenium.

Lee Korins is president and chief executive of the Security Traders Association.

The equity-trading marketplace has more choices and more challenges than ever before.

Are you looking for liquidity in a thinly-traded stock? Trying to minimize the market impact of a block order? Seeking to get the best price, or simply to get the trade done?

Take your pick from dozens of trading destinations, including nine electronic communications networks and some 45 alternative trading systems.

But the question is whether it is a good thing to have so many different trading destinations to choose from?

Sure it is, if you are equipped to access them electronically, that is, with the minimum amount of clerical work and maximum speed. In that case, more choice means more opportunity the chance to trade at lower costs or to find the liquidity you wouldn't have otherwise encountered.

But if your connectivity is limited, all these choices start to look like something else: fragmentation of liquidity and a big competitive disadvantage. You are at a disadvantage to traders plugged into electronic networks and not hampered by changes in the equity marketplace.

All signs are that liquidity sources will continue to proliferate, and that more trading will be done electronically. According to Greenwich Associates, a Greenwich, Conn. research firm, more than 57 percent of all institutions and 96 percent of large institutions currently use alternative trading systems to execute at least some of their orders. And those numbers have been rising steadily.

This suggests that in the coming years, there will be a widening gulf between the haves' and the have-nots' those who can easily utilize an array of liquidity sources and those who cannot.

Of course, the growing complexity of the marketplace isn't the only reason why connectivity has become one of the most frequently heard buzzwords on Wall Street. For those handling large lists, using quantitative strategies, targeting a benchmark or working with strict portfolio parameters, tracking orders on a yellow legal pad simply isn't practical any longer.

For those trading large blocks, it has become that much harder to tap into information such as indications, let alone find liquidity. With growing trade volumes and intense pressure to increase performance, traders can ill afford to spend time functioning as clerks.

Regulatory factors also come into play. Some examples include the order-handling rules and the clearing of trades 24 hours after execution, the T+1 requirement that's looming on the not-too-distant horizon. These regulations will all but mandate some wiring.

Without electronic allocations, for instance, it hardly seems possible to ensure trades will be cleared and settled within the truncated, 24-hour period the Securities and Exchange Commission is expected to impose in two or three years.

Then there are all the benefits to be gained from greater automation of trade communications and processing. For instance, if you can achieve straight-through processing, whereby trade information never has to be entered more than once, you increase productivity while reducing errors. With easy access to a range of execution sources, you gain control over trading costs, expand opportunities for price improvement and increase your ability to get trades done. Then you can begin to use the new generation of smart trading tools which use real-time analytics and optimization. That helps pinpoint which trades best fit your goals and parameters, and helps to flag the tough transactions requiring the trader's personal attention.

But here's the real payoff: When technologies are so well-integrated that traders no longer have to spend time on routine communications and clerical tasks, they become free to focus on their real job namely, adding value through the trading process.

No Easy Answers

It's a tantalizing vision a future of seamless, paperless trading, where any trade destination is just a mouse-click away. The question is how to get there. Connectivity isn't something you can just buy and install, like a bigger server or a faster hard drive. You have to find ways of making disparate, single-purpose technologies work together, including the ones you already have in place.

As many institutions are learning, compliance with the industry-standard Financial Information Exchange, or FIX communications protocol, may be necessary for connectivity solutions, but not sufficient. It's really only one piece of the puzzle.

Nor will an order-management system provide a quick fix. It may not support all the connections you want, and must still be integrated with other services and information systems.

By definition, connectivity is a multi-dimensional framework. It encompasses all the physical connections, networks, communication tools and software applications that link the trading desk with internal systems, information systems and trading venues.

Connectivity solutions are also unique to each situation. There is no universal standard or one-size-fits-all configuration. It's all about your organization's trading workflow and how you most want to expedite it. Which brokers and electronic trading systems do you want to access? How do you want to access these systems? How much does your desk stand to gain from increased automation? What's the best way for you to channel allocations? How high a priority do you place on electronic trade reports? Given your trading style, which is more important to you: automating backoffice functions or minimizing the time traders spend on the phone?

Fulfilling the Promise

It often does seem that trading technology is a double-edged sword. We've reached the point where technology can be applied to every aspect of the investment and trading process, enabling traders to function with greater efficiency and intelligence with every step along the way.

But while streamlining some tasks, we've created new ones. Now trading firms need to manage technology as well as transactions.

At Los Angeles-based ITG Inc., for instance, effort is spent making it easier for clients to access ITG and other liquidity sources.

In fact, connectivity is the common thread in almost everything done at the firm from developing technologies and establishing links with other trading systems, to customizing system configurations for clients. More new connectivity solutions, including a smart-routing product, are currently under development.

Connectivity will be the focus of many of the technological advances. But institutions don't have to tackle connectivity challenges alone. Besides working on development and implementation of new technologies, ITG spends much of its time engaged directly with clients. The pursuit of connectivity is a complex, constantly-changing endeavor.

But these days, we're all in it together.

Yossi Beinart is executive vice president and chief information officer at Los Angeles-based ITG Inc., operator of POSIT. The firm has published a guide, "From Chaos to Connectivity," designed for institutional trading desks tackling connectivity challenges.

Robert DiBraccio understands the importance of a good relationship with a firm's portfolio managers.

In his first year as the head equity trader at Delaware Management Company in Philadelphia, DiBraccio has tried to increase his desk's communication with the firm's 19 equity portfolio managers.

"I'm trying to get the traders to talk to the managers, letting them know what's happening on the desk," he said. "The portfolio managers appreciate input from the desk, and they consider the desk more of an integral part of the management process that way."

Delaware Management, a large-cap value manager with $46 billion in assets under management, has $26 billion invested in equities, and invests only in domestic stocks. DiBraccio manages six institutional traders, and his desk mostly handles large block orders. He said roughly two-thirds of his desk's orders are for 100,000 shares or more, and half are for blocks of at least 250,000 shares.

Those large positions require DiBraccio's traders to work closely with managers.

"Liquidity is the overriding concern," he said. "We really need to know where a manager is coming from with an order. Traders have an expertise, and managers need to have confidence that we can get the job done handling these large blocks. That's why communication is so important."

DiBraccio first developed an open relationship with a portfolio manager during his six-year tenure at Wellington Management in Boston, trading for legendary stock picker John Neff.

At that time, Neff managed the Vanguard Windsor Fund for Wellington Management. He was widely known across Wall Street for his astute ability to pick under-valued stocks and later sell them at their peak.

"John did a lot of research himself," DiBraccio remembered. "He would talk to executives and companies, getting to know the businesses he was investing in. He had a disciplined style. He wouldn't buy high fliers. He bought things that were out of favor, and he had the fortitude to stick with those stocks. He had confidence they would turn."

The stocks usually did turn. During Neff's heyday with Wellington Management, the Vanguard Windsor Fund regularly had high returns. In 1983, the fund had a total return of 30.1 percent. In 1985, it had a 28 percent total return. With the market still recovering from the crash the year before, the fund had a 28.7 percent return in 1988.

"John taught me how to be patient when I needed to be, and aggressive when I needed to be. He understood how to get into and out of institutional positions," DiBraccio said. "He also taught me how to be part of a working team with a portfolio manager. We talked on the telephone maybe 20 times a day. The trading almost became instinctive. I knew his mindset. It's a trader's job to know."

As a portfolio manager's most direct link to the market, DiBraccio talks to sell-side brokers as often as possible to know what is going on in different stocks during the trading day. He rarely uses alternative trading systems, instead choosing to work orders over the telephone with brokers.

"We need to know what's happening, so we can communicate with our managers about the market," he said. "We don't want to get into clerk-type functions just entering orders. We need to have relationships with people across Wall Street."

DiBraccio has a list of 150 brokers to work with, but his desk only uses 25 brokers regularly. Delaware Management's broker list is inflated because of its directed-brokerage arrangements. The firm has 150 separately-managed accounts, with 25 percent of those accounts using directed brokerage.

The firm uses step-outs to handle the directed orders, and DiBraccio tries to direct less than 30 percent of each client's order flow.

"These are our clients' commissions, and they can do with them what they want," he said. "But when you get over 30 percent, we think it costs the plan in the end."

DiBraccio, who graduated from Trenton State College, started in the brokerage business in 1981 working for the State of New Jersey in Trenton. He traded for the state's pension funds, and handled equities, options, bonds and money-market accounts. "It was like getting paid to go to graduate school," DiBraccio said.

Wanting to concentrate on equities, and seeking the higher pay scale of a private firm, DiBraccio joined Wellington Management in 1986. But after trading there for six years and learning the business from Neff he left the firm to join Delaware Management in 1992. He took over its desk last year.

Along with the transition on the desk from trading to management last year, DiBraccio and his wife Lydia had to get used to a busier household. The DiBraccios who have an eight-year-old son and a six-year-old daughter had twins early in the year, a boy and a girl.

"It was chaos. It was tough for a while," DiBraccio said. "But things have settled down. I'm enjoying myself."