For some private companies, the lure of going public may be too much to resist. Practically instant growth, and the chance to put business on a faster track, are certainly tantalizing.

More than $180 billion in finance was raised by underwriters over the past ten years for thousands of companies.

Even so, why are many new companies left feeling like stock-market orphans after the hoopla and initial-public-offering process is completed? Why do the strongest only get the full support of their underwriters after the IPO tag falls from the stock?

Part of the reason is investor relations (IR), a strategy used by public companies to disseminate their business objectives to the financial community.

Of course, the underwriters' unwritten rule is that they provide coverage of the company after the IPO process, according to Sarah Mavrinac, research director on a recent IPO survey conducted by accounting giant Ernst & Young. About 30 percent of these companies, she noted, are "orphaned" immediately after the IPO is completed.

Indeed, most newly-public companies are satisfied with the IPO process overall, according to another IPO survey, released by Stapleton Communications, a Mountain View, Calif.-based investor relations firm.

Almost 90 percent of the 200 technology companies surveyed by Stapleton said they had chosen the right underwriter for them. The Ernst & Young survey found that nearly 72 percent of the 474 responding companies were satisfied with the process.

However, when it comes to aftermarket support, companies in both surveys were less than pleased. Mavrinac said that many of the companies without aftermarket support didn't invest in IR. These companies fall into two categories: those that don't properly value IR and those that do but don't know how to engage IR strategies.

"[IR] is key in developing relationships with the investment banker and analysts," Mavrinac said, adding that the companies that do, generally pick-up coverage quickly.

"Today, companies, rightly or wrongly, expect underwriters to hold their hands a little bit after the IPO," said Stapleton President Deborah Stapleton. The survey found that in many cases, respondents felt their first research report was not as timely, comprehensive or positive as they would have liked.

"The IPO process has become a commodity," Stapleton added. "Every firm conducts the IPO process in basically the same way. What sets banking firms apart is their ability to place the stock with the sought-after long-term investor, and to be there to support the companies long after the deal is done."

While 90 percent of the respondents in the Stapleton survey believe that they chose the right underwriter, 81 percent wished they had conducted more research before their selection.

On average, the companies looked at 8.13 underwriters before their selection. The vast majority, 93 percent, said they had absolute confidence in their underwriter and were well prepared for the roadshow.

Ranked on a scale from one to five, underwriters got 4.34 for their overall support and commitment during the transaction, but that number slipped to 3.76 for their support and commitment after the transaction. The Stapleton survey gave an average rating of 3.60 to underwriters' ability to place shares with long-term investors. While companies named a strong research group as the top reason for choosing an underwriter, companies were also "underwhelmed" with the quality of research they received from firms in their IPO syndicate.

According to the Ernst & Young survey, the failure of managers to adequately prepare themselves and their employees for the responsibilities of public life may have some impact on their companies' long-term performance.

"Almost all 90 percent of our respondents report making some change in the company's policies and procedures," Mavrinac said. The most popular change, made by 90 percent of the companies before an IPO, was to create an IR strategy. And 68 percent reported making changes in their board structures, while 62 percent reported making changes in their executive-compensation systems.

Mavrinac said successful firms launched changes in their IR, internal-control systems, financial accounting, executive compensation and employee-incentive programs about one-and-a-half years prior to the IPO. The majority of "super successful" IPOs installed their IR strategy at least six months before the IPO, Mavrinac said.

When asked what they would do differently if they had a second chance, respondents' in the Stapleton survey concentrated on three main topics: timing, research and co-managers.

First, the old hats at the IPO process said they would focus more attention on understanding the underwriters' knowledge and background in a particular industry. Others said they would spend more time thinking about post-IPO events and changes to the business. Others believed the main issue is post-IPO support and the underwriters' ability to bring in additional market makers and liquidity for the stock.

Philip Scipio is senior editor at Investor Relations Business, a sister publication of Traders Magazine.

Instinet was once a sleepy U.S. domestic broker. Not anymore.

It now spans the globe, executing buy and sell orders electronically across international borders a far cry from the system first conceived as a computer network for institutions trading New York Stock Exchange-listed stocks.

Back in the early days, life was different. During Instinet's first 14 years, in fact, volume grew at a snail's pace. Then times suddenly changed. And in 1983, Instinet took the industry by storm when it began trading Nasdaq stocks. Business grew spectacularly.

Four years later, bigger changes were afoot. Instinet was acquired by Reuters Holdings PLC, the British news and information giant. Among the new owner's boldest moves: giving customers the ability to cross stocks anonymously with each other. That move worried Nasdaq.

Now, institutional accounts and others, trading with each other or directly with the broker, paid a commission to Instinet and part of the bid and asked spread, rather than the full spread made by the market maker.

Trading on Nasdaq was being partly disintermediated because investors could trade between the spread, and market makers were no longer making the difference between the bid and asked price on each trade. That didn't stop market makers using Instinet to lay off their positions, however.

Anonymity

When Instinet added anonymity in April 1989, some clients actually canceled their accounts. Anonymity meant that a trader could no longer avoid paying commissions on some orders.

Buying 25,000 shares, for example, the trader could no longer enter an order for 1,000 shares, wait and see who took the other side and then phone that party to trade the other 24,000 shares. (Instinet now charges pennies or less on shares of the U.S. trades it executes.)

Some say Instinet's maneuvers were prescient. Today, trading among customers between the bid and asked spread is explicitly approved under the Securities and Exchange Commission's order handling rule. What's more, anonymity and the lack of market impact are viewed as Instinet's main attraction to traders. Back in the 1980s, however, that caught Nasdaq off guard.

Nasdaq's parent, the National Association of Securities Dealers, fought back with its own private network, an upgraded SelectNet. Instinet now competes with Nasdaq for order flow, and reportedly accounts for 20 percent of Nasdaq volume, the equivalent of more than 100 million shares daily. Instinet enables a Nasdaq market maker or buy-side trader to select each stock's page on their Instinet terminal. The user can then anonymously hit a bid, enter an ask or negotiate with a buyer to raise the bid between the spread.

Two years ago, the last time reliable figures were available, Instinet had an estimated 5,200 customer terminals worldwide. In theory, Instinet is open for real-time trading 24 hours each day, 365 days a year. In practice, Instinet volume in a stock declines at night once that stock's primary market has closed, with activity surging during important world events.

Global Markets

Today, Instinet is taking on the global markets. A registered broker dealer in 16 countries, and correspondent relationships with brokers in others, Instinet trades in 40 markets. Foreign customers now account for an estimated 70 percent of Instinet's global business, up from 25 percent in 1992.

Instinet's fastest growing customer-segment is European fund managers trading securities across national borders, according to Doug Atkin, executive vice president of Instinet and chief executive of Instinet International.

These European managers use Instinet whenever they forego the primary markets to trade their stock on the international marketplace. Foreign customers account for about 75 percent of Instinet's global business, up from about 25 percent in 1992. "Instinet's global business will equal its U.S. business in three years," Atkin said.

The global push dates back to Instinet's acquisition by Reuters. The new parent's first move was to open an outpost in London to attract U.S equity order flow transacted out of London on SEAQ International, the lightly-registered screen-based wholesale market for broker dealers trading large amounts of foreign stock. SEAQ is run by the London Stock Exchange (LSE).

By 1992, Instinet embarked on another mission: establishing direct electronic connections to the major European exchanges, including exchanges in Paris, Frankfurt and Zurich. That meant clients could access the exchange floors directly. "The mid-sized U.S. broker dealer that wasn't a member, could use an Instinet terminal to execute overseas," Atkin said.

Next, Instinet gave foreign fund managers and brokers the ability to trade across national borders. Brokers could trade stocks not listed in their home country through a central source of liquidity, Instinet, as distinct from sending orders for the same stocks to brokers based in the primary markets.

On one terminal, the broker could access global markets and pay a commission, settling each trade using Instinet. Consequently, some say Instinet was bringing liquidity to the global markets. When the system can draw French and Asian customers to the Dutch market, "Instinet is a friend of the local broker," Atkin said. "It doesn't compete with their core business."

Crossing Sessions

Instinet International performs some crossing sessions. In the U.K., the cross is scheduled up to seven to eight times each month. The Japanese cross takes place every two weeks, or more frequently if necessary. Atkin views crosses as a natural extension of trading, but stresses that relying exclusively on crossing is a mistake.

That's because a major source of liquidity on international orders comes from trading upstairs. For example, with an order to buy one million shares, a client may send a piece to a French exchange, another to Instinet to buy from a natural counterparty and the balance upstairs, where an Instinet sales trader acting as an agent may find an institution willing to sell.

Another example involves lists of stocks traded across several markets. Instinet sometimes receives four or five lists or program trades daily, each valued at more than $20 million, executed by Instinet as an agent for a charge of perhaps ten basis points.

Recently, Instinet received a $500 million order from an Asian fund manger to trade more than 400 stocks across 25 markets. First, Instinet performed a pretrade analysis to determine which stocks would be most difficult to execute, and then filled the order. The client said it was one of his best trades, Atkin claimed. "That combination of local exchange-liquidity and the ability to trade upstairs is what's driving the business," he added.

Here's a peek at what's happening across the globe for Instinet:

Australia The land Down Under has one national exchange, the electronic-based Australian Stock Exchange. The Aussies, however, denied Instinet membership on its exchange two years ago because it didn't recognize Instinet as a broker dealer. That may be about to change. Instinet's Atkin said the current atmosphere for membership is more hospitable.

JAPAN Instinet hopes to join the Tokyo Stock Exchange within the next two years. Since other Asian markets do not allow electronic trading, Instinet operates in these markets like a conventional broker, communicating by telephone.

London Instinet competes with SEAQ on the LSE. SEAQ has about 50 registered international dealers making markets in international stocks.

(Foreign companies listing with SEAQ totaled about 1,000 in 1997, up from 550 in 1990. These include such large, liquid issues as General Motors, IBM, Royal Dutch Petroleum, Deutsche Bank and Siemens.)

On Oct. 20, 1997, Big Bang II thundered through London and trading in the U.K. was impacted. At the LSE previously a quote-driven dealer market an order-driven central electronic limit order book, the Stock Exchange Trading Service (SETS) was introduced. SETS is used for stocks in the FTSE 100, an index of the LSE's 100 top-performing stocks.

SETS plans to add 250 more stocks this year. An LSE spokesperson noted that a quote-driven market may be better for less liquid shares. The spokesperson added that there are no plans to expand SETS over the 350 largest stocks.

Atkin said that Instinet is the only broker dealer that provides customers with the ability to send orders directly to the SETS order book instead of by telephone.

How's Instinet business since the Oct. 20 bang? "Booming," gushed Atkin.

An Offshoot

International electronic trading is a consequence of the globalization of equity markets.

A Greenwich Associates' survey of more that 100 institutions in the U.S. revealed that the number using electronic systems to execute non-U.S. trades grew to eight percent in 1996, up from three percent the previous year. Sure, there are troubled economic spots that fund managers avoid.

Still, for growth and diversification, many have satisfied their portfolios outside the domestic markets and want more international trading action.

Buyside and sell-side traders use electronic trading systems to execute orders for foreign stocks, in part to minimize transaction costs.

Beside Instinet, other players on the international scene include New York-based ITG's POSIT, the Portfolio System for Institutional Trading, a crossing network jointly launched in 1987 by Los Angeles-based Jefferies & Company and BARRA, a California-based software and investment research firm. ITG typically forms alliances with local partners to penetrate foreign markets.

A money manager using Bloomberg Tradebook an electronic communications network (ECN) can view market makers quotes for Nasdaq stocks, as well as INCA and BTRD, the identifiers, respectively, for Instinet and Bloomberg customers.

New York-based ESI Securities is Tradebook's executing and clearing broker. The ECN started operations in December 1996. Bloomberg said volume is averaging about seven million shares daily.

Customers seeking anonymity can post trades through Bloomberg's book for execution. However, broker customers using the Tradebook terminal to post an indication of interest transparent to institutional investors may be able to complete a trade by telephone, without having to pay a commission.

While Bloomberg acknowledges that its system may be used this way, the company is not perturbed because it said these customers enhance liquidity.

At the moment, Bloomberg Tradebook trades Nasdaq stocks, but plans to add listed stocks early this year, said Kevin Foley, equity trading manager at Bloomberg Tradebook.

For customers in the U.K., however, Bloomberg offers a link to Tradepoint Financial Network's electronic trading system in London. More importantly, with Securites and Exchange Commission approval of Tradepoint in the U.S. pending, Bloomberg is planning to provide a connection for U.S. institutions that want to trade U.K. stocks on Tradepoint.

Tradepoint's volume was described by a source as "not great, and relatively low" compared to Instinet's volume. Nonetheless, the source noted that if U.S. institutions are allowed to participate, then a critical mass could be achieved. Moreover, if Bloomberg Tradebook becomes a channel for U.S. investors to access Tradepoint, that could pump up liquidity as these investors access a roster of more than 1,900 British stocks.

Two years before Big Bang II hit London last October, transforming the London Stock Exchange's (LSE) strictly quote-driven dealer market, Tradepoint Financial Networks was started as a computerized, order-driven market. Buyers and sellers would simply meet electronically and negotiate their own prices. Tradepoint, which is officially recognized as an exchange, trades domestic U.K. stocks. However, it does not trade foreign stocks, like SEAQ International.

Tradepoint is officially recognized as an exchange and trades domestic U.K. stocks. Unlike SEAQ, it does not trade foreign stocks.

Tradepoint now trades 1,900 stocks, including those on the FTSE All-Share Index and fledglings. Customers include institutions, market makers and brokers, all trading anonymously.

To be sure, Tradepoint's volume pales in comparison to the LSE. And it has had its setbacks. It faced financial difficulties, and to remain afloat it was refinanced twice during the summer of 1997. One observer said the system still has problems, because market makers use the system only to print their trades.

For instance, Tradepoint might receive a small amount of revenue on 1,000 prints, compared with a much larger amount of revenue on 50 trades, albeit real trades. A Tradepoint spokesman said the latest refinancing brought investment from three large broker dealers, adding that they would not have invested unless they were confident about the exchange's future.

In late October 1997, Tradepoint applied to the Securities and Exchange Commission in the U.S. for permission to allow U.S. investors to trade directly on the exchange.

Market data giant Bloomberg confirmed that it would provide an electronic link for U.S. investors accessing Tradepoint, pending the SEC's approval of Tradepoint's application. Approval is expected this month. The link would be provided through Bloomberg Tradebook.

Electronic trading is not the only way to handle an international order. That's the message from Doug Atkin of Instinet International, an affiliate of Instinet. Another way to buy or sell an international stock is to break up an order. That order is then traded in separate pieces: electronically, on exchange floors and upstairs, where an Instinet sales trader, acting as an agenct, calls institutions that might be willing to take the other side.

But anonymity is clearly very important. "An [anonymous] cross is the best way to do the trade," said Bob Russell, senior vice president of new business at New York-based ITG Inc. Even so, not all orders handled anonymously will match.

Thus in Australia, the institutional money manager selling a list of stocks on POSIT may send residuals that don't cross to ITG Australia, a joint venture of ITG and Austrailian broker dealer Burdett, Buckeridge and Young.

In Canada, using the trade analytics provided by ITG and partner Versus Technologies, a U.S. money manager could route his order for crossing, look for direct electronic execution on the major Canadian exchanges or send his order upstairs to ITG's Canada desk. Therefore, direct exchange execution and upstairs trading complement electronic trading, improving execution and enhancing liquidity, experts say.

At the 1996 Republican National Convention in San Diego, an official from Sherwood Securities personally active in the Grand Old Party made an astonishing discovery a lobbyist for American florists was circling delegates with a million dollar smile. Oh, boy.

Dennis Marino, president of the Jersey City-based market maker, does not tell the story in flowery tones, but in a voice filled with horror at the thought of how another group traders are amateurs of checkbook diplomacy inside Washington's corridors of power.

Next time the government repeals some special tax on a bunch of red roses, perhaps that million-dollar smile is the reason. But Marino is not amused and continues his story:

"He [the official] was having drinks and ran into a young lady, the lobbyist for American florists. They chatted awhile and she told him how the florists raised one million dollars in political contributions in the previous twelve months. One million dollars."

Marino mentions this almost religiously, he says, whenever he talks to traders about political action committees (PAC), and for good reason he's now chairman of the Security Traders Association's fledging PAC, the STA Political Action Committee (STAPAC). STA President John Tognino and Laura Cooley are STAPAC's president and treasurer, respectively. (Cooley serves as a strategic consultant to the STA.)

Harnessing Support

Tognino credits Marino for harnessing support among STA members. "When Dennis became STA chairman, one of his priorities was starting a PAC. He said enough was enough, we needed to be active in Washington," Tognino said, referring to Marino's 12-month stint as STA chairman that ended last October.

Marino's drive initially resulted in the formation of a committee to look at the business of PACs. The committee was headed by Andy Brooks, an activist on the STA's Institutional Committee and head of trading at T. Rowe Price in Baltimore.

Now just twelve-months old, STAPAC has a serious purpose, and that is to support congressional candidates that the STA believes hold a balanced view on securities market-structure and policy.

So far, STAPAC has raised a little more than $100,000, contributing some of that money in turn to five Democrats and four Republicans on Capitol Hill.

The five Democrats are Rep. Tom Manton (D-N.Y.); Rep. John Dingle (D-Mich.); Rep. Tony Hall (D-Ohio); Rep. Dianna DeGette (D-Colo.); and Rep. Paul Kanjorski (D-Pa). The four on the Republican side are Sen. Alphonse M. D'Amato (R-N.Y.); Sen. Phil Gramm (R-Texas); Rep. Rick White (R-Wash.); Rep. Michael Oxley (R-Ohio); and Rep. Robert Bennett (R-Ohio).

"It was a bit funny, and yet it was a bit frightening," said Marino of the San Diego epiphany. "When you think about it, if an industry like the florists believes it is important enough to have political representation and can raise one million dollars, it shows how anemic our efforts have been in this business."

Highly Respected

Marino is one of the most highly-respected executives in the Wall Street equity-trading business, and he speaks like he is fighting for the lives of his professional colleagues, and maybe he is.

With the stock market generally roaring, these are not bad times for traders. But a storm may be whipping up. Blame some well-calculated market change namely, the order handling rules that ultimately has narrowed spreads more than 30 percent and made limit orders practically profitless. The widespread trading in teenies that followed, reportedly narrowed spreads still further, by another ten percent.

The local florists in Dorchester, Mass. and Brooklyn, N.Y. would storm Congress with machetes if they were forced to sell carnations to customers at the same prices the florists pay their suppliers.

Admittedly, this is a bad comparison with the drama of the order handling rules designed, in fairness, for individual investor protection but one Nasdaq trader couldn't help making the analogy. "The government is beating us up," he complained. "We have to fight the government bare-knuckled."

Record trading volume and intelligent trading helped many desks finish last year with good harvests. But once volume slows, as it may some day, sooner or later, the math could look altogether horrible, some traders say.

A Voice

STAPAC, however, is about more than order handling rules and teenies. It is about having a voice at the world's toughest political dogfight on Capitol Hill. "With all that is going on in our industry, there are many, many important issues that affect our individual members, and we want to be heard more in Washington," Tognino said.

Under Tognino's leadership, the STA wasted no time making its Washington presence felt, retaining a seasoned Capitol Hill attorney turned lobbyist, Stephen Blumenthal, hiring a separate lobbying firm to fight a new transaction fee on Nasdaq trades, opening a Washington office and meeting with regulators. Tognino himself testified in Congress last year on decimilization.

Last January, the STA inaugurated a financial-industry conference in Washington attended by top legislators, including the aforementioned Gramm, D'Amato, Bennet, Oxley and White.

But the STA's campaign this year to solicit contributions for STAPAC among its 7,000 U.S.-based members may overshadow anything that has happened before.

"The bigger the financial assets in the PAC, the more work we can do and the more impact we can have," Tognino said. "That's what we are aiming for."

STAPAC will particularly eye members of the Senate Banking, Housing and Urban Affairs Committee and the House Commerce Committee, because these committees have jurisdiction over securities laws and the Securities and Exchange Commission.

While the SEC is the federal agency created by Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933, and has rule-making authority, Congress can pass laws to curtail the SEC's authority. Additionally, Congress appropriates the SEC's budget.

Federal Candidates

Under the law, individuals can contribute up to $5,000 in a calendar year to a PAC, according to the "Almanac of Federal PACs," by Edward Zuckerman. A PAC, in turn, with as few as two persons, can contribute up to $5,000 to federal candidates each year.

There is no overall annual limit on total contributions when PACs raise money from at least 50 persons. In the 1991-1992 election cycle, PACs raised $385 million, spending $9 million more than they raised. PACs have critics, of course, and are sometimes controversial.

"As PACs have gained influence, they have become increasingly the object of criticism," noted Herbert E. Alexander, director of the Citizens Research Foundation and professor of political science at the University of Southern California in Los Angeles.

"Poll data indicates that a majority of Americans feel that too much money is spent on elections, and those with money to spend on elections have too much influence over government," Alexander said.

Former President George Bush denounced big-money influence in politics and called for the abolition of PACs. Some lawmakers loudly complain that their dependency on PACs hurts the legislative process.

One critic blames the savings and loan crisis in the late 1980s partly on special-interest money at work in Washington, citing Charles H. Keating and his failed Lincoln Savings and Loan Association.

Marino is aware of the criticism. "Campaign financing is a rather sensitive subject, and it may appear like an inappropriate time for the STA to form a PAC," Marino said. "The fact is, that is how things are politically done in this country, and we want to do it within the letter of the law."

That fact of life, of course, can be traced to the waning influence of party political machines in this century, in the days of Tammany Hall in New York and Boss Daly in Chicago.

A brief history may be instructive. Party political influence, as Alexander noted, diminished successively since the Civil Service replaced party-controlled patronage as a means for filling government jobs; since government-sponsored social services replaced those which urban party organizations had used to attract the allegiance of voters. PACs are filling this void.

"They represent loyal constituencies, they fund primary and general elections and, some would say, they even discipline' the votes of Members of Congress," Alexander said.

Well-Heeled Group

It may seem extraordinary that a well-heeled group of Wall Street traders are financing a PAC to influence the political process. Back in the old days, this overt category of political activism was the province of labor unions and the downtrodden. But as the trader above said, "We have to fight the government bare-knuckled." Several traders and other Wall Street professionals praised the STA's initiative.

Is STAPAC attempting to somehow discipline members of Congress that do not follow the STA party line? Perhaps. "We want to be heard more in Washington," Tognino insisted. "We want to give those candidates that support the STA's position an opportunity to get elected."

There are signs that the STA's stepped-up activity in Washington is succeeding. Some crusading congressman have taken up the issues of alleged abuses on SOES. Earlier this year, the General Accounting Office embarked on a study of SOES at the request of Rep. Gary Ackerman (D-N.Y.); Rep. Sam Gejdenson (D-Conn.) and Rep. Charles Schumer (D-N.Y.)

Big Question

The big question is: How much will STAPAC raise? Outsiders might guess that the war chest could stretch to many millions of dollars. Individually, some top traders will take home several million dollars in year-end bonuses. They surely would not miss a four-figure sum. But many other traders will have more modest paydays.

"It is really subjective," Marino said. "It depends upon where an individual may be in his development. I just think it is important that whatever traders can afford, even if it is $20, it is essential they recognize that we have to be part of the political process."

STAPAC's contribution drive is starting to pick-up steam. STA members will each receive a solicitation in the mail as well as a brochure outlining STAPAC's mission. The first contributions came when STAPAC made presentations to Sherwood Securities, Knight Securities and Troster Singer, all large neighboring firms in Jersey City. STAPAC was pleased.

"Traders will have to write checks to get the attention of lawmakers," said Patrick Ryan, president and veteran trader at McLean, Va.-based Ryan, Lee & Co., a lifetime Washington-area resident.

"Sometimes," he added, "it takes a bite in the butt to wake people up and stop them saying, Gee I didn't know [Congress] was passing laws that could hurt us.' We've got to get involved."

Traders Magazine is the official publication of the Security Traders Association. The editorial content in the publication, however, is independently produced. Therefore, this story should not be mistaken as a solicitation in behalf of STAPAC.

Payment for order flow on Nasdaq business could soon be facing extinction. The profit on each Nasdaq trade, which once enabled a market maker to pay an order-entry firm around two cents a share for order flow, has shrunk threatening the rebates vital to some discount brokers.

"Payments have been cut about 50 percent across the full range of orders," said Leonard Mayer, president of New York-based Mayer & Schweitzer, a Charles Schwab Corporation affiliate and leading Nasdaq market maker.

"Quite honestly, I think payment for order flow on Nasdaq business will soon be a thing of the past," said Tom Dudenhoefer, head of Nasdaq trading at St. Petersburg-based Raymond James & Associates.

But while a cut in half may seem significant, Mayer contends that payment on marketable orders orders that enable the dealer to profit on the spread is not down as significantly.

One industry expert said that while payments on limit orders are down dramatically, payments for marketable orders are still close to historical levels. In fact, the 50 percent reduction does not reflect a cut in all payments, but mostly the dramatic drop in limit-order payment, the expert added.

Mayer said his firm no longer pays for limit orders, because the vast majority do not offer the opportunity to make a profit. The firm will continue to pay for marketable orders.

"Mayer & Schweitzer does not pay for limit orders anymore," Mayer added. "And I would say that generally, market makers have ended the practice of paying for limit-order flow."

Jerry Kasten, a specialist on the Boston Stock Exchange for Garden State Securities,

agrees. "Nobody pays for limit orders because no money can be made," he said.

Kasten added that payment for pure market orders on strong stocks remains close to normal levels, with rebates around two cents a share. But payments for less stable stocks has dropped to below a penny, he said.

The Practice

A payment-for-order-flow arrangement is typically forged between a discount order-entry firm and a broker dealer. Generally, it refers to the payment of cash by dealer firms to brokerages to induce them to send aggregated small orders to purchase or sell securities to the dealers for execution.

Often, it is discount firms that enter into the order arrangements to subsidize their low commissions with the fees from broker dealers typically a penny or two a share.

Payment for order flow has long been a controversial part of Wall Street trading. A broker's fiduciary duty is to obtain the best possible execution for a customer's order. But the obvious temptation is to send orders to the market maker offering the highest rebate, regardless of best execution.

But last year, the practice survived a Supreme Court challenge, and the Securities and Exchange Commission has ignored frequent requests to ban the arrangements.

"There is very little in the securities industry that does not involve some sort of back scratching," said Andrew Davis, a Chicago Stock Exchange (CSE) specialist for Rock Island Securities. "Payment for order flow is a valid and well-regulated part of the business. With a lot of other types of deals, the customer never really finds out what is going on."

On listed business, payment for order flow is an important element of trading on the regional exchanges. Davis estimates that half of the CSE's total volume is paid order flow. "Among third-market firms and other regional exchanges, I would guess close to 80 percent of order flow is paid for," Davis added.

Davis explained that the rebate structure for order flow is quite complex, involving a ranking of tiers of stock. Firms distinguish which stocks offer the best chance of profit weighing spreads, liquidity, activity and history and set their payments accordingly. Davis said payments for the top tier, perhaps strong performing blue-chip stocks, could run two cents a share. A Standard & Poor 500 stock, on the other hand, could rebate between a penny and two cents a share.

"Payments have gotten more complex over time," Davis said. "These payments are essential for discount brokers and order-entry firms. Retail customers are choosing this equation, because it works for them."

The Threats

But it is the economics of declining profitability, not regulatory or customer objections, that threatens the practice on Wall Street.

"Spreads have narrowed a full third and profitability is down, so dealers are more sensitive to paying," said Jack White, founder of La Jolla, Calif.-based discounter Jack White & Co.

As a result, White's firm has shifted the focus from sending orders to dealers for payment. "We are continuing to develop a vital electronic crossing network for our retail orders," White added. That system, first activated on the Internet in September 1996, had early operational problems.

"The future of the equity markets is customers crossing shares rather than going to the dealers," White said. "The dealer market is dying."

White believes that customers want developed electronic systems to bring together the two sides of a trade. "Dealers are not providing as much liquidity," he added. "The liquidity is coming from the public."

With the order handling rules requiring market makers to display customer orders to the entire market, many of the limit orders brokers receive are priced better than the current quotes. These limit orders an order to buy or sell a stock at a prespecified price do not enable a dealer to profit from the execution.

Nasdaq spreads narrowed more than 30 percent after the order handling rules took effect, and still further with the widespread trading of stocks in sixteenths.

"I would say the reduction in payment for order flow has occurred because of the economics of narrower spreads and the execution of many more flat trades," Mayer said. "The profit margins of market makers have been reduced, which brings about a reduction in payment."

The Future

Daniel Weaver, an associate professor of finance at New York's Baruch College, suggests that while widespread order-flow payment may decrease, it will not disappear. "It allows firms to design and control their order flow," Weaver said. "If you can control who you get orders from, you can make more money than by just taking orders as they come."

Mayer agrees. "I am always cognizant of marketing to firms with a more desirable order flow," he said. "I have more interest in a natural selection of orders from customers making investment decisions. I have less interest in order flow emanating from day traders and momentum players."

On the CSE, Davis said most specialists have not cut order-flow rebates. At the moment, they are examining the changing economic structure of the industry. Davis believes minor adjustments in CSE rebates may be made this year.

Davis is president of The Association of CSE Specialists (ACSES), a four-year-old cooperative that oversees operational matters for roughly two-thirds of the CSE's specialists.

"It is naive not to recognize the value in the flow of orders," Davis said. "No one gives away business. But the way we do it [at ACSES], we take the high road and let everyone know what is going on." ACSES files payment reports with the CSE, the New York Stock Exchange, Nasdaq and the Internal Revenue Service.

Mayer contends that order-entry firms should focus on best execution of their customer orders, and route orders to a market maker providing consistent, quality executions and exceptional service. In selecting a market maker, he suggests, an order-entry firm should consider those that have advanced features and provide a positive impact on their customer's executions.

"Regardless of payments, customers should come to a market maker for its service," Mayer added. "Systems and service should distinguish market makers from one another, with those at the top providing superior execution."

T Erik Conley, head of the active equity trading desk at The Northern Trust Company in Chicago, has always fancied himself an advanced student of trading.

Conley, articulate and well-informed, pushes himself to stay ahead of industry trends. He is a voracious reader of trade publications and immerses himself in technology shows and market-structure debates. "Trading is the most challenging thing I've ever done," Conley said.

"I'm matching wits with the best and the brightest," he added. "So I try to learn something every day, and use my experience to my advantage."

Conley works hard to keep transactions consistent with his portfolio managers' projections. "I once read that the skill of discovering undervalued stock was in abundance on Wall Street," Conley said. "What distinguishes money managers is trading cost. A good trader's job is to find liquidity, lessen market impact and execute at the lowest possible cost. My goal is to capture a manager's envisioned return."

At Northern Trust, staffed with more than 200 money managers, Conley is held accountable by many of them for best execution.

The Northern Trust Company is the principal subsidiary of Northern Trust Corporation, a Chicago-based multibank holding company. The parent has 64 U.S. offices and 7,250 employees worldwide. Total assets under administration was $898.4 billion in 1997. Northern Trust, the subsidiary, is an Illinois-chartered commercial bank founded in 1889. Northern Trust has $158 billion in assets under management, $47 billion of which is invested in equities.

Equity investment at Northern Trust is divided between two trading desks. The passive desk, staffed by two traders, engages in informationless trading and manages $20 billion in index products. The two traders keep portfolios consistent with the major stock indices.

The active desk, headed by Conley, manages $27 billion in assets. Conley and two traders execute orders for Northern Trust's money managers.

Having begun his career on the sellside, Conley has an understanding of how buy-side traders work with broker dealers for execution.

From his perspective trying to capture portfolio managers' envisioned returns by transacting executions at the right price Conley uses two judicious approaches to trading.

"Certain situations call for speed in trading, usually when a portfolio manager has a strong conviction a stock will overperform," Conley said. "In those situations, the best way to accomplish our execution is to ask a broker partner to commit capital and to provide liquidity."

Conley is careful not to overuse that tactic, having been on thesellside. If a broker loses money too often by committing capital, Conley said, they become reluctant to trade with you.

When speed is not paramount, Conley looks to black boxes as alternative sources of liquidity. "ECNs [electronic communications networks] are a good source of liquidity and carry little market impact." Conley said.

After graduating from Marquette University in Milwaukee in the late 1970s, Conley got a job on the sellside as a trader at Blunt, Ellis & Loewi in Milwaukee. He worked at the firm for 15 years, devoting his last five years to building a convertible arbitrage fund. As head trader for that fund, his approach was one of a buy-side trader.

After 15 years at Blunt, Ellis & Loewi, Conley wanted to return to his hometown of Chicago. He took a job on the buyside at Harris & Associates. After three years at Harris, he took the job at Northern Trust as desk head in early 1995.

"Going back to Chicago was a great move for me," said Conley, who is married with four children, two of college age and two in elementary school. "Chicago has all of the advantages of a large metropolitan center and a great school system."

When Conley started at Northern Trust, the trading technology was grossly outdated. "The traders were still using the green Quotron screens from the 1970s, and although they had Instinet, it wasn't being used," he recalled.

Conley set his mandate that winter to update the trading technology. He became a technology student, attending shows, reviewing software and talking to people in the industry about their systems.

Today, the active desk uses Bridge for its data market feed, and employs Bloomberg, Reuters, Instinet and POSIT data and trading software. Orders from money managers are routed to the desk by the Predator order-management system. Predator bypasses the need to print tickets, as orders can be sent from system to system. "The new technology is fascinating," said an awestruck Conley. "There is always something new to learn."

And Conley understands the value of education.