September 21, 2008

Matt Samelson, senior analyst at Aite Group, says Russell's position as a buy-side firm with sell-side support for its products indeed is unique. "Their brokerage operations are really there to support the distribution of their investments products. They not only control their product but the means of distribution as well it give them a more favorable situation," says Samelson. "It all comes down to the fact that they've removed the sell-side bias and kept it from creeping in, which ultimately lets them use the benefits of a captive agency brokerage without the stigma attached."

Samelson adds that the hybrid model also is a unique cost saver and efficiency driver. "The good thing about being your own captive brokerage is you don't have to depend on outside brokers and you get priority," he points out.

Russell's size is also what makes this model successful, says Imhof. "We're not too big and doing so many different things that we're spread across two floors and everyone is far away," he says. "We're trading global equities, global derivatives and currency all within five or 10 feet of each other." [Ed. note: For exclusive photos of Russell's trading floor, see "Anatomy of a Trading Floor."]

Trading Operations

Rothenberg notes, however, that it's significantly more expensive to go through the regulatory process and ensure proper internal controls to build out this model. "Everyone who touches assets is dually registered and dually responsible to the oversight you find as an asset manager and in accordance to FINRA on the sell side," he says.

There is no traditional group of sell-side traders or sales traders, Rothenberg adds. "We look at everything as an asset management exercise. But how we go about implementing that for clients is a little different," he says.

Rothenberg says the trading floor is physically structured to follow the flow of information to the trading desk. The quantitative research group is situated further away from the actual traders, while the portfolio managers and traders are seated very close to one other to foster open communication. The derivatives, equity, fixed income, agency, foreign exchange and short-term cash trading groups are all located in very close proximity.

"Information flows back and forth electronically, but the open communication affords the color associated with the trade and leverages skill sets to add a layer of value," says Rothenberg. "The lay out of the floor allows both the trading desk to be reactive to macro instructions and the portfolio managers to be responsive to the micro-movements of the marketplace."

Apparently, the model is working. Russell has seen trading volumes increase exponentially over the past five years, from less than $200 billion to more than $1 trillion today.

In order to accommodate that growth, Russell also depends heavily on its "process engineers" and IT integration teams, which sit on the floor and work closely with the portfolio managers, traders, researchers and the rest of the team, according to Imhof. "We don't have to go to corporate IT [to implement operational improvements]," he says. "They're right there on the desk with us."

Russell employs about 15 IT employees across its operation, which currently comprises about 145 staffers, Rothenberg reports. That means about 10 percent of the team is dedicated to IT work and support, a pretty significant number, he notes.

"The model is unique because it's specific to Russell, its reputation and how it uses the model," explains Aite's Samelson. "But if someone else tried to start the same model, it might not have the same advantage."