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February 06, 2006 12:00 AM

Mastering a shrinking trade

Rosenblatt Securities uses old-fashioned ways to gain share in an industry besieged by technology

Gregory Crawford
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    NEW YORK — Rosenblatt Securities Inc., New York, is leveraging its expertise in market structure and its history of paying close attention to client needs to grab a bigger piece of a shrinking pie — handling stock trades for money managers.

    That's because traders at money management firms and hedge funds continue to take more control of their equity order flow through electronic platforms, crossing networks or use of computer-based algorithms.

    "More and more trading is being done away from the people who are used to executing stock for the buy side, which is doing more (direct market access) and using more algorithms," Joseph Gawronski, Rosenblatt's chief operating officer, said in an interview.

    "So how do you respond to that? You can bury your head in the sand, which some people have done, and complain about it or you can say, ‘OK, I'm going to improve my own trading so I get a bigger share of a shrinking pie.' "

    To do that, Mr. Gawronski and Richard Rosenblatt, who founded the firm in 1979, focus on issues such as market structure and their own need to be well informed on the major issues facing traders at money management firms.

    Too much to digest

    "Even the major buy-side firms are not going to read all 500 pages" of Regulation NMS, the new market structure regulation passed last year by the Securities and Exchange Commission that will take effect later this year, or the numerous New York Stock Exchange filings with the SEC related to its transformation into a hybrid exchange that will combine both floor-based and automatic execution trading, Mr. Gawronski said.

    But Mr. Gawronski will.

    "We need to do that for our own business so we're the best at what we're doing in trading, and if that is useful to multiple clients, it's time well spent," he said.

    Since late 2003, the firm has been sending its clients a monthly newsletter, Trading Talk, which is Messrs. Rosenblatt and Gawronski's take on market structure developments and how trading might look in a new environment.

    "There's nobody filling this niche," Mr. Rosenblatt said.

    Other examples of the firm adding value include working on improving algorithms and both pre-trade and post-trade transaction cost analysis, he said.

    "There are some things that are relatively new, products that are quickly becoming basic requirements in the industry," he said. "Algorithms is one and pre-trade and post-trade analysis is another. And they're both problematic."

    He said that while algorithms — complex computer programs that handle trades electronically — are increasingly necessary for traders at money management firms, many of them look alike. Also, on transaction cost analysis, Mr. Rosenblatt said accuracy and value remains elusive.

    "We believe there's a lot of room for building creativity back into trading, even when using algorithms," he said, explaining that the firm is working with a technology company to create what he called interactive algorithms.

    "Currently all the pre-trade (analysis) products out there are the same and none of them are accurate," he continued. "They'll give you your fixed costs, but when it comes to looking at the opportunity cost piece of the puzzle, they're all over the place. There's no need for that."

    Mr. Gawronski added that bringing value to money management firms is more than "pushing out better tools to our clients."

    "It's also about understanding our clients' needs and having the resources available to deal with clients and what their major issues are," he said. "It may be transaction cost analysis, it may be installing a new order management system. Maybe they want to talk about the (NYSE) hybrid — what it's going to mean to them and to trading." He added, however, that the firm's core is in trading, not technology.

    The Rosenblatt business model appears to be resonating with clients, according to Mr. Gawronski. The firm, which is private, does not release financial information but he said revenues in 2005 were up more than 50% over 2004.

    "We know who we are and our job is to provide to customers those things that either would be difficult or impossible for them to develop in-house," he said. "We're in a humble end of the business. When we start falling in love with our own ideas, we're on our way down the tubes."

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