Ten years ago, Automated Securities Clearance was a small but pushy software company that competed for order-management business with TCAM Systems.

How times have changed. Weehawken, N.J.-based Automated is no longer an upstart, peddling its core BRASS system and order-routing services.

BRASS now overshadows the rival product of TCAM, the New York affiliate of Waltham, Mass.-based Stratus Computers, and upstages the products of other vendors.

These include London's Royalblue Group, Trinitech Systems in Stanford and New York's QV Trading Systems. Moreover, BRASS handles a majority of the order flow on Nasdaq desks.

But the question remains: Can BRASS, the industry standard, stay on top in a business with hostile competitors?

Bygone Days

BRASS and its competitors have their origin in a bygone era. Years ago, Nasdaq traders used paper pads to track their changing positions, profitability and average costs.

On a busy day, the trader's assistant scribbled down trade information. Sometimes keeping track of information was not easy. Mistakes were made.

Clearing and settling trades was another matter. After a trade was executed, a ticket was typically dropped into a box which was taken to the backoffice. Keypunch operators then entered trade data for processing.

Eventually, entrepreneurial vendors developed order-management and trade-processing systems to make post-execution support speedier and cheaper.

BRASS, for instance, allows traders on Nasdaq desks to adjust their quotes; to hold limit orders if necessary; to monitor profit and losses, or P&L; and to interface with clearing brokers.

Faced with a cost-efficient alternative, traders abandoned the paper-based record-keeping and order management for TCAM, BRASS and others.

Two Categories

Wall Street's order-management and trade-processing systems fall roughly into two categories: proprietary software developed by firms, accounting for 40 percent of the business; and the rest, handled by vendors such as BRASS.

BRASS is estimated to control 50 percent of the market, and has about 130 accounts.

Order-management and trade-processing firms make money by selling their software and hardware to the sell-side community, and through subscriptions, with sell-side firms paying for each terminal or for licensing the vendor's software.

In the latter, the trading firms do not have to buy and maintain the products.

TCAM sells and licenses its product and competes with Royalblue in the outright sale of its business.

BRASS sells a total package to some firms, particularly the largest, and it runs the software and provides backup for other firms.

First Vendor

In 1982, TCAM became the first vendor to develop an electronic trading system. In the roaring 1980s, TCAM was the only game in town. Mentioning Automated to a trader would have invited a blank stare.

In the early 1990s, computer-hardware maker Stratus acquired TCAM, hoping that the software-maker's dominant position would help it sell more computers on Wall Street.

The shaky marriage, however, distracted TCAM from its core business product for equity-trading operations, say people familiar with the firm.

The timing of the marriage could not have been better for BRASS and Automated, which had launched a new software written for the newly-popular UNIX platform.

Under sustained attack from BRASS, TCAM fired back in 1994, acquiring Marlboro, Mass.-based Femcon Associates, then the number-two player in the order-management business.

Upheaval

While BRASS's dominant position is still not in dispute, upheaval in the securities industry can sometimes take even the smartest players by surprise.

"The advent of electronic trading, alternative trading systems, FIX [the Financial Information Exchange, a computer protocol for buy-side and sell-side firms] and other developments is also contributing to the upheaval," said Joseph Rosen, managing director at New York-based technology consultants Enterprise Technology Corporation.

Stratus was recently acquired by Alameida, Calif.-based Ascend Communications, a networking hardware maker. Ascend indicated it will spin-off or sell non-core networking and telecommunications businesses.

If it does, TCAM will embark on an amicable divorce from Stratus and revert to being an independent company with $25 million in sales and 150 employees worldwide, say people familiar with the firm.

Dave Bennett, TCAM's sales director for North America, is optimistic, but he cautions that the vendor needs to refocus on software. "We were distracted by the acquisition," he said.

TCAM has mapped ambitious plans that could unsettle the field of competitors.

"Our real thrust is to provide an Interment-based front-end to capture order flow," Bennett said. TCAM said it had signed accounts recently with Detroit-based Olde Discount Corp., New York's National Discount Brokers and St. Louis-based Edward Jones.

The plan clearly does not surprise one industry expert.

"Technology has advanced so much that there is a lot of opportunity for new and existing players," Rosen said. "Trading firms, meanwhile, are looking for alternatives.

Some experts think TCAM's strength lies in winning business from stock exchanges around the globe. TCAM, for instance, has already signed deals with the Istanbul Stock Exchange and the National Stock Exchange in India.

Big Plans

TCAM is not the only vendor with big plans. Royalblue is also upping the ante.

Royalblue makes the Fidessa trading systems, which are used on the London Stock Exchange's order-driven market.

The U.S. subsidiary, Royalblue Technologies Corporation, has signed its first major order, worth $2 million, and has passed the breakeven mark on a monthly basis.

However, Royalblue's threat to BRASS is questionable.

"As the company tries to take the product international, Fidessa is a threat, but not a major one, to BRASS," said Lawrence Tabb, director of technology research at The Tower Group in Newton, Mass.

In the U.K., Royalblue's accounts include brokerage giants Merrill Lynch & Co., Dresdner Kleinwort Benson and Morgan Stanley.

Most recently, Royalblue signed an agreement with Tradepoint Financial Networks, the U.K. electronic stock exchange, and with the London Stock Exchange. The agreement will enable investment banks using Fidessa to execute orders on either exchange.

Even more seasoned players, such as Trinitech, are muscling in on the order-management and trade-routing marketplace.

Trinitech is marketing NYFIX, the Exchange Access Network and FIX-compliant system that links buy-side and sell-side firms and exchange floors.

"We are seeing a rapid increase in quarterly recurring revenue supporting our strategic vision of electronic order routing, which we began executing in late 1997," Peter Kilbinger Hansen, Trinitech's president and chief executive, noted in a recent earnings announcement.

Bothered?

The competition does not overly bother Robert Greifeld, who heads up Automated. He is confident that his company will not only retain its leadership position, but will take market share from competitors.

Moreover, Greifeld is prepared to take on all comers even though the competition is formidable. Some rivals are said to have more "open" systems than Automated. Royalblue, for instance, has been complimented for being accessible to other industry systems.

"We have, and we are going to take market share away [from our rivals]," Greifeld said.

Partly to retain traders' loyalty, Automated launched several other products, including BRUT, an electronic communications network. Before that, it launched BNET, which allows broker dealers to route orders to other broker dealers.

Greifeld's next big project is a so-called "OATS-in-a-box system" which basically combines the trader's needs on one desktop. As the name suggests, that includes compliance with the Securities and Exchange Commission's Order Audit Trail System, or OATS.

Minneapolis-based Piper Jaffray and brokerage giant CIBC Oppenheimer recently signed up for the new products.

"The only way we [can grow] is by being more responsive to our customers' needs, making sure that we meet the demands of the trading community," Greifeld said.

Planning to bid for an institution's portfolio? A profitable way to utilize capital? Don't be fooled. Every year, broker dealers enter the business and soon quit when losses mount. Only the strongest survive. Among them is D.E. Shaw Securities, one of Wall Street's top principal portfolio-trading firms.

The New York-based broker-dealer subsidiary of D.E. Shaw & Co., which started trading portfolios as a principal in the early 1990s, now averages four principal trades daily, and this year handled one trade with a value of about $1 billion. (A typical principal portfolio trade is valued at only $50 million.)

D.E. Shaw Securities regularly bids "blindly," using quantitative trading technology. But, explains Mony Rueven, managing director in charge of portfolio trading and the firm's 30-strong U.S. institutional equity group, portfolio trading is not for amateurs.

Q: D. E. Shaw Securities is well known as a quant shop that employs mathematical models in trading. So why is it handling portfolios, or so-called equity baskets?

A: Trading portfolios on behalf of institutional clients fits in very well with our other dealing activities, where we make markets or provide liquidity in equities, convertible bonds, warrants and equity derivatives, both in the U.S. and overseas.

It is also a business in which our quantitative-trading and risk-management expertise gives us a clear competitive advantage. It is no secret that sophisticated institutional investors have analyzed their holdings as portfolios for a long time. Only in the last few years, however, has the buyside begun to see the often substantial benefits of trading lists, or portfolios, rather than individual positions.

D. E. Shaw Securities, for example, often provides institutional clients with analysis to help them decide how they should trade particular lists of stocks as a portfolio versus individual positions, as a principal versus agency positions, and so on.

The institution has a number of choices: principal basket trades, agency basket trades, incentive agency trades, basis trades and EFPs [exchange for physicals]. While they're sometimes used to satisfy special trading needs, institutional investors most commonly use basket trades to invest new cash flows, change asset allocation and rebalance portfolios.

Q:Let's focus on a principal basket trade. Provide an example.

A:Say a money manager is rebalancing his portfolio and has $50 million of equities to buy, and $50 million of equities to sell. He'd basically have two choices about how to execute this list. He could execute it conventionally, doling out individual trades on an agency basis to brokers. The brokers would work them on the floor of an exchange or on an electronic communications network.

Alternatively, the money manager could approach a firm like ours, which, without seeing the trades in the list, would bid for the entire portfolio as principal, offering to execute all of the component trades at market-closing prices for a flat, per-share commission. That's called blind bidding.

Q:How can you bid on a portfolio as principal if you don't know the positions it contains?

A:Here's how it works, mechanically: Every month or so, we provide our clients with a floppy disk containing the latest version of our proprietary portfolio-bidding software.

Whenever they like, they can run this software on a list of positions they'd like to trade. The program will generate an encrypted bid (but no information about actual positions) along with a two-page report giving some of the macro-characteristics of the clients' portfolios things like dollar value long and short, percentage Nasdaq versus listed, index tracking, average spread and some other statistical measures.

The client e-mails or faxes this report to us. We then analyze the report, decrypt the bid and contact the client with the actual price, say 12 cents a share.

All of this means that we're willing to sell to the client all of the positions he wants to buy, and buy from him all of the positions he wants to sell, for a flat 12 cents a share over the entire portfolio. Trades for exchange-listed stocks would occur at their closing prices on the relevant primary exchange, and trades for over-the-counter stocks would take place at the midpoint of Nasdaq's inside market at the close. The bidding process is competitive.

If we're the low bidder and we win the basket, we don't actually see what it contains until after the close, which is when the trade occurs.

Q:Why would a money manager pay 12 cents a share to trade this way, when he could pay an agency commission of 6 cents a share to work these trades conventionally?

A:You have to remember that commission costs are only one component of overall trading costs. There are many trades for which slippage and opportunity costs substantially outweigh the more explicit costs of commissions.

Since all of the position risk in the case of a principal basket trade is transferred from the client to D.E. Shaw Securities, the commissions on principal baskets are usually higher than commissions for agency trades. Because a client's slippage and opportunity costs are effectively zero, however, overall transaction costs are often lower with a principal basket trade than they would be with other methods for trading the same basket of stocks.

Q:Can you help an institution decide the best way to trade a particular basket on a case-by-case basis?

A:Yes. We're asked to do that quite often. The huge focus on transaction costs in recent years means that the buyside is more sensitive than ever before to hidden costs, like slippage and opportunity costs. So, we're able to use our proprietary models to help clients analyze how much slippage they should expect to suffer completing a particular trade under various time horizons. We show them the numbers, and then let them decide how to trade.

Sometimes, the smartest thing for the client to do is to have us trade a basket on an agency basis, whereby we use our quantitative trading techniques to minimize market impact. For other baskets, trading as principal is best. It's all in the numbers.

Q:What are the most common applications for principal basket trading?

A:Principal basket trades are ideal for high-opportunity cost trading, when a portfolio manager believes it's important to move money into new stock picks quickly.

Q:Some bulge-bracket firms also bid for principal baskets. How can

D.E. Shaw Securities compete against larger firms?

A:You have to remember that firms win principal baskets from clients via a competitive bidding process. Since the executions offered by competing firms is the same trades always take place at market-closing prices clients almost always award the basket to the lowest bidder.

So, the question really is, How can D.E. Shaw Securities bid so aggressively for these trades?'

The answer is that we believe our risk-management tools to be superior to anyone else in this business. We can bid aggressively for a portfolio because we think we can hedge it more effectively and less expensively than our competitors. That allows us to liquidate the positions very patiently over time.

In fact, we probably bid more aggressively than anyone for difficult trades small-cap and mid-cap baskets included because we have a much better understanding of exactly how much it will cost us to hedge and liquidate difficult positions. It also helps that D.E. Shaw Securities has substantial capital.

Q:Is the field of competitors on the dealer-side crowded?

A:It's funny. Every year some new firm decides to enter this business. They bid too aggressively, win lots of baskets, lose $30 million dollars and drop out of the business six months later. Our pricing is quantitative, not seat-of-the-pants. We're happy to lose a basket if someone else is bidding too aggressively for it.

Q:Do you think portfolio trading will become more popular?

A:It's becoming more common every day. Once upon a time, it was only quantitative money managers, or those who were especially good at measuring transaction costs, that understood the benefits of trading this way.

Today, we're trading with some of the largest pension funds and mutual funds in the world. But I should point out that it will always be the case that different modes of trading make sense for different trades. The portfolio-trading shoe doesn't always fit.

That's why we offer agency baskets, principal baskets, single-stock agency trades, third-market trades and block executions. The trick is knowing what trading mechanism makes the most sense for a given trade, and then helping your customers optimize the implementation of their investment decisions accordingly. This is a concept we call "smart liquidity."

We believe, in fact, that the market makers and dealers around ten years from now will be the ones who have learned that one size doesn't fit all.

Maureen Yeazel may be getting back to Europe soon. A majority stake in Yeazel's firm, Harbor Capital Management Co. in Boston, was recently acquired by the Dutch bank Fortis.

Fortis' Paris-based investment subsidiary, Fimagen, now oversees operations at Harbor Capital. Over the last few months, Fimagen has brought several Harbor Capital employees to Paris for consultations in U.S. business practices.

Yeazel has not yet been scheduled to revisit Paris a city she toured in a year abroad after graduating from Vanderbilt University in Nashville in 1981.

But Fimagen has sent several Paris executives to Boston to observe Yeazel's responsibilities as head trader at Harbor Capital.

"At Fimagen, they don't have traders. All of the portfolio managers trade for their own accounts," Yeazel said. "They want to find out how having a trading team will improve their business. It's something I can help them with."

Yeazel understands her role at Harbor Capital implicitly. She joined the firm in 1985 as its first trader.

At the time, Harbor Capital's portfolio managers handled $700 million in assets and traded for their own accounts. But as business became too busy for the portfolio managers to trade efficiently, the firm hired Yeazel, who was trading as State Street Research & Management Company in Boston.

"I was very young when I came to Harbor Capital, and it was a once in a lifetime opportunity to structure a desk myself," Yeazel said. "I just took a shot, and it all worked out."

In 13 years, the trading desk has grown to four traders, and the firm's eight portfolio managers now handle more than $6.2 billion in assets. More than 85 percent of those assets are invested in equities.

For Yeazel, the most difficult part of building the desk at Harbor Capital was changing the trading approach of the portfolio managers.

Previously, the portfolio managers handled and traded for their own accounts. Yeazel wanted the desk to bundle and coordinate portfolio managers' individual orders.

"Instead of a portfolio manager concentrating on one account, we now have policy meetings where all of the managers decide what to buy and sell together in all of the portfolios," she said. "Orders are planned and coordinated much better."

Yeazel sits in on the policy meetings, and is in charge of implementing the decisions.

Trading by stocks, Yeazel handles fewer orders. But the orders are larger. The larger positions allow the traders to establish positions quickly and to work more closely with sell-side traders.

"The portfolio managers were somewhat reluctant to give up control, but they realized it was in the best interest of the investors and the firm. But we needed to be sensitive with changes," Yeazel added.

In 1991, Yeazel implemented the Merrin Financial Trading System at Harbor Capital. The order-management system allowed the firm to monitor and route all orders electronically.

With Merrin, the portfolio managers electronically send orders to Yeazel's trading desk, and the traders can then route orders without writing tickets or typing order information. The system sends orders electronically to the floor of the New York Stock Exchange and to Nasdaq market makers.

"The more I can send orders electronically, the better. It's quick and efficient," Yeazel said. "I need all of my systems to be tied together, compatible with my Merrin blotter."

The increase in electronic trading has allowed Yeazel to dramatically reduce the number of brokers her desk works with regularly.

In 1996, Harbor Capital worked closely with more than 60 sell-side brokers. This year, Yeazel expects to work closely with only 20, and focus on just five brokers.

Yeazel wants to keep her broker list short, to ensure her business is important to the sell-side firms she works with. She meets three times a year with her portfolio managers to rate commissions for sell-side firms. More than 80 percent of her firm's trading commissions go to just 20 brokers.

"I want a professional, consistent sales trader who treats us as an important client," Yeazel said. "I'll continue to send orders to a firm that treats me professionally."

Last year, Harbor Capital installed Commission Optimizer from New York's ESI Securities. The software allows Yeazel's desk to track commissions to sell-side brokers, and produce detailed commission reports.

The software was customized for Harbor Capital, and it eliminated the need to track commissions by hand.

Spending less time mired in administrative functions functions handled by Merrin and Commission Optimizer Yeazel may have time for a second trip to Paris. It would make a nice family vacation for Yeazel, her husband Gordon and their two sons eight-year-old Hayden and five-year-old Madison.

But Yeazel has not yet been scheduled for a Paris visit. At the moment, Fimagen seems to prefer observing her in Boston. Yeazel's too much of an asset in her own environment.