Big Brokerages Get the Jump on Institutional Online Trading - TheStreet

Big Brokerages Get the Jump on Institutional Online Trading

But some question whether institutions, which like to cloak their big trades in the market, will even want the service.
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Wall Street finally figures it's time to do more than react to online brokers.

Several top Wall Street investment banks are preparing to offer online trading to their institutional clients in a bid to beat the same online brokers that ate into their retail trading business.

Merrill Lynch

(MER)

and

Goldman Sachs

(GS) - Get Report

are among the bulge-bracket players whose institutional online plans are moving off the drawing board.

The belief is that institutional customers will want the ease of online trading just like retail investors did. Of course, these same institutions already have some electronic trading resources, such as

Reuters'

(RTRSY)

Instinet

.

But once-beaten Wall Street sees competition coming. Online broker

E*Trade

(EGRP)

says it's working on a system to provide online trading to institutional players by next year.

Wit Capital

(WITC)

also has said it plans to start gunning for the institutional business early next year.

But there's one major problem: The appetite of institutional investors seems rather light.

"It's kind of like having a PC to balance your checkbook," says David Briggs, head of equity trading at

Federated Investors

(FII) - Get Report

, a Pittsburgh-based mutual fund advisory company. "I want my portfolio managers to talk to their traders and salespeople. I want to see that there has been a dialog and conversation."

Federated does about 13% of its trading electronically through systems such as

Instinet

and

ITG Technologies

(ITG)

.

Indeed, it's systems such as these, which for all practical purposes allow institutions to trade electronically, that make an institutional online trading system seem like a white elephant.

"Institutions tend not to use all the tools they have available to them now, so it is not certain an online trading system would have much impact," says Michael Flanagan, who runs the independent

Financial Services Analytics

. "Effectively, we're already there."

Ironically, one of the prime attractions of online retail trading -- lower costs for the client -- isn't a driving force for institutional online trading.

"I don't know if institutional customers are going to see a major cost difference," says Mike Alex, who is spearheading

Jefferies'

(JEF) - Get Report

institutional online push. Institutional order flow is usually linked to floor charges and commissions, the prices of which have come down considerably in recent years and may not change much even if the institutional client is now doing the work of the broker himself, Alex says.

In fact, cost may not even be of primary concern to the institutions themselves. Commission fees are far less important than the ability of a sizable institutional trade to be kept hidden so it doesn't impact the stock in a way that hurts the institution doing the trade, something that is much more difficult to do online, says Federated's Briggs.

It's no good to pay 4 cents per share less for a trade if, by doing it online, the full size of the trade is revealed and the stock moves 10% against the institution, he explains. "Institutional trading requires finesse, skill and professionalism," Briggs says. "I don't want some daytrader out there to think some big institution has an opinion on some stock one way or another."

In the face of all this, Wall Street has been struck with an uncharacteristic inability to articulate why institutions need online trading. Instead, the focus is on not getting beat again. Big brokerage archnemesis E*Trade, for instance, plans to roll out its institutional online trading service through its

TIR Holdings

unit, which has about 600 institutional clients, by mid-2000, a spokesman says.

Fearful of this competition, Wall Street marches through a fog of peer pressure that seems mostly self-made. "It's pretty competitive out there with everybody trying to get these things up and running," says a member of the Goldman Sachs team working on that firm's online effort,

gs-online.com

. Goldman is working "quietly away" at providing online trading to institutional clients, he says, adding that the system will begin to come together within a few months.

"At least I hope so, or I'll be out of a job," says the Goldman insider, requesting anonymity.

Merrill Lynch, which created an online banking effort called

Direct Markets

in September, already allows about 200 to 300 clients to send orders electronically through vendor connections with firms like

Bridge

or

Bloomberg

, or by a direct connection into the firm itself. Within the next few months, Merrill plans to offer institutional investors another choice.

"Soon they'll be able to go through our salespeople, through a vendor or direct connection, or over our own Web site," says Tom Joyce, a Merrill managing director who recently was moved from running U.S. equities operations to overseeing the electronic trading effort.

Of course, the question is whether institutional clients even want the choice.