Advanced Electronic Equity Execution Set to Rise Nearly 150% by 2006, Says Tabb Group Report, 'Institutional Equity Trading in America'.

Business Editors/High-Tech Writers

BOSTON--(BUSINESS WIRE)--April 20, 2004

Details Impact of Algorithmic Trading, ECNs, Soft Dollars, Decimalization, OMS, TCA, Market Structure, Crossing Networks, Trading

Platforms and Broker Relationships from Buy-side's Perspective

Results of In-depth Interviews with 52 Investment Management and

Hedge Fund Traders at AUM $1.1 Trillion to Under $10 Billion Size

Firms

Gone are the days of a simple broker network. Faced with a changing market structure, equal virtual access to the markets, aggregation technology decentralizing marketplaces and crossing networks facilitating size discovery, buy-side traders now enjoy direct access to advanced electronic trading strategy execution servers.

But are they better off with access to this advanced arsenal of model-based execution tools?

In a securities industry report, "Institutional Equity Trading in America: a Buy-side Perspective", released today, The Tabb Group provides answers to questions, such as "If the buy-side can trade thousands of shares at the touch of a button, are they doing it better, cheaper and with less effort? While it may seem apparent, do they even know how to use this technology? By taking a more active role in trading, are they doing it better than if they delegated trading to brokers? And if they bypass brokers, how will they get value-added services, such as research and market information?

The report summarizes interviews with 52 head and senior traders at investment management firms and hedge funds with assets under management (AUM) over $1.1 trillion to under $10 billion. "We discussed their views on equity trading," says Larry Tabb, founder and CEO, The Tabb Group and report's author, "from order management systems, to market structure, through transaction cost analysis, and segmented our findings into large, medium and small firms." The report is 56 pages long and includes 50 exhibits.

"The US equity markets are facing unparalleled change," adds Tabb. "The sheer amount of change stemming from the 1997 SEC Equity Order-Handling Rule, underpinned by massive technology improvements, has been mind boggling, earth shaking. These rules put in motion developments that have challenged the most major of our institutions, transforming the very value proposition of the industry and the underlying mechanics of how we invest (in America)."

Says Tabb, "The interviews we held over two months, during January and March of this year, supplied us with deep, rich levels of information. For one thing, we learned that advanced electronic equity execution, known also as algorithmic trading, is set to rise 144% within the next two years."

The report states that while change is coming it's not a revolution but an evolution. Technology and platforms will become more robust, metrics and management will get tighter, traders will become more adept at using the new technologies and platforms and soon they will be crossing more, trading more, delegating more and adding more value.

However, the most important issue for the buy-side will be less about specific trading technologies and more about value. Adds Tabb, "We wanted to learn, when do you add value, when do you detract value, how do you measure value and how do you maximize value? Understanding the value equation, we believe, will help guide the trader toward an execution strategy, dictating the proper time to delegate, cross, trade and ask for capital."

Key findings include:

-- Broker relationships: Buy-side traders continue to value their

broker relationships, claiming that the broker services they

most value are idea generation and research (26%) and

execution quality (23%). While overall buy-side traders place

great value on research and execution, it is larger-size firms

(over $US 1.1 trillion) that place the most value on

technology, connectivity and quantitative execution

strategies.

-- Soft dollars: While 73% continue to value broker research with

nearly seven out of 10 of the firms paying for research with

soft dollars, two-thirds said that they were not currently

using soft dollars or planned to reduce their reliance on soft

dollars in the future.

-- ECN impact: Today, 88% of buy-side firms have connectivity to

at least one ECN. A clear 40% of firms accessed ECNs through

aggregation (DML) technology, which provides connectivity to

most major ECNs and a consistent execution platform across

heterogeneous trading venues. Most firms now use ECNs to

reduce market impact (32%), gain greater control of their

executions (22%) and lower trading costs (16%). Overall, most

firms are using ECNs to reduce market impact and provide a

more control execution environment. Reducing fees was the

major reason larger firms now use ECNs (42%).

-- Crossing networks: The majority of buy-side firms are using

crossing networks (70%), ranking finding liquidity (49%) and

reduced market impact (40%) as the primary benefits. While the

majority of firms ranked finding liquidity as the most

important characteristic of crossing networks, larger firms

overwhelming claim that reducing market impact was the primary

benefit (74%).

-- Algorithmic trading servers: One of the newest trading

technologies embraced by the buy-side is algorithmic trading

strategy servers, which splits larger order into smaller ones

and automatically executes these orders in relation to a

specific trading strategy. Overall, six out of 10 firms

surveyed used these model-driven execution tools. However,

eight out of 10 (or 82%) of larger firms reported using

algorithmic models. While a majority is already using these

tools, 57% responded that they were still in the

experimentation phase of understanding how to effectively

deploy these models on their trading desks.

-- Market structure: While buy-side access to trading tools and

trading markets has gained significantly, they still face

trading challenges, the largest being the NYSE market

structure, where 71% of firms aggressively voiced wide

displeasure with the current market structure, followed by

nearly 50% citing fragmentation as their second-highest rated

challenge.

A copy of the report is available at www.tabbgroup.com/research.

About The Tabb Group

The Tabb Group is a financial markets technology strategy and planning consultancy focused on helping financial services firms, vendors and technology integrators better understand, create, align and execute their business technology visions. Based in Westborough, Massachusetts, The Tabb Group was founded in June 2003 by Larry Tabb, a 24-year financial markets veteran and the former vice president, securities and investments at TowerGroup, until recently a division of Reuters Group, where he managed research across the capital markets, investment management, retail brokerage and wealth management segments. For more information, visit www.tabbgroup.com.