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Tide of portfolio trading threatens to erode commissions Add to ...

Everyone on the Street acknowledges that the future of trading will see more stock changing hands on electronic networks at far lower commissions. What folks might not realize is that the future is now.

Half of U.S. institutional equity trading done last year took the form of what's known as portfolio trades, according to a study from consultants at Greenwich Associates. This type of trading sees a basket of stocks bought or sold at one time, rather than one company added to a portfolio while another comes out.

The 50-per-cent share is a high-water mark for this type of activity. In 2002, Greenwich found 44 per cent of U.S. buying and selling took the form of portfolio trading.

This traffic moves through the Street in patterns quite different from the way business has traditionally been done, and requires greater depth from the equity desk.

Here's an example of how the institutional world has evolved.

A generation back, a pension fund manager would come into work, decide it was time to move from cyclical stocks to financials, and sell Inco to buy Royal Bank.

Now, that money manager is more likely to make the same strategic call, but opt to sell a basket that includes Alcan, Abitibi, Inco, Tembec and Noranda, and pick up a new portfolio that includes all five big banks, the three insurers and a little CI and AGF, just to spice things up.

Add in the growing pile of assets held in index funds, which do nothing but portfolio trading, and you've got a major wave moving through the dealers, one that's going to wash away market share and profits from equity desks at traditional brokerage houses.

Let's deal with market share first.

Greenwich found that over a third of the portfolio traffic gets routed through electronic trading networks.

These systems, which include those run by companies such as E*Trade and ITG in Canada, match buyers and sellers in cyberspace, with little human input. They're no longer niche players. To their credit, all the major dealers are also devoting an increasing amount of their resources to portfolio trading clients.

The arrival of the electronic networks is putting downward pressure on prices. Greenwich's research found that U.S. portfolio traders pay an average of 2.2 cents (U.S.) in commissions on each share they buy and sell. A third of portfolio traders claimed to be doing business for less than 1.5 cents a share. If anything, the Canadian commissions would be slightly lower, as our market tends to be hypercompetitive on price.

In contrast, traditional institutional stock trading plays out at commissions of 4 cents a share or more, or twice the price demanded for trading a basket of stocks.

"For institutional investors, the game is pretty favourable right now," Greenwich Associates consultant Jay Bennett says. "Institutions are lowering costs by using portfolio trading for a larger proportion of their volume and by directing a portion of those portfolio trades to self-directed electronic trading systems."

However, the shifting market dynamics highlighted by portfolio trading can only come at the expense of traditional equity desks.

BMO hot to trot in U.S.

BMO Nesbitt Burns is getting increasingly serious about its U.S. expansion.

The investment banker who was running its strong Canadian merger and acquisition team, Geoff Belsher, has been bumped up to head of North American mergers and acquisitions, based out of Chicago. Among the reformed Blake Cassels & Graydon lawyer's major responsibilities is strengthening the dealer's presence south of the border.

Under the Harris Nesbitt banner, BMO's investment dealer arm has been slowly but steadily building a presence in the United States, acquiring teams and boutique dealers, targeting the huge market in small- to mid-capitalization U.S. corporate clients, and cross-border work for Canadian companies.

To replace Mr. Belsher in Canada, BMO Nesbitt Burns hired Andre Hidi as an executive managing director and head of its domestic takeover team, which numbers 20 professionals. Mr. Hidi also has an enormous amount of cross-border deal-making experience. A Canadian with a Stanford University MBA, he started his career at Morgan Stanley and was co-CEO of Salomon Smith Barney Canada and CEO of Smith Barney Canada.

Haywood drills deeper

Haywood Securities deepened its commitment to the mining sector and Central Canada last week by hiring analyst Chantal Gosselin to its research team. The veteran of Dundee Securities joins Vancouver-based Haywood's growing Toronto office.

Fluent in Spanish and Canada's two official languages, Ms. Gosselin spent nine years in the mining industry before moving into research, and helped build engineering departments with companies in Canada and Central America during stints at Aur Resources, Pan American Silver and Black Hawk Mining. Haywood head of research Rob Goff said institutional clients supported hiring Ms. Gosselin because of her "hands-on mining experience, equity knowledge and objectivity."

awillis@globeandmail.ca

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