May 14, 2008

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Ray Tierney is not your typical buy-side global trading head. First of all, he spent the past 25 years on the sell side (the last 14 at Morgan Stanley). Second, his team offers nothing but praise for his leadership, his sense of humor and his dedication to a new vision for the buy-side trading desk.

Tierney made the jump to the buy side less than two years ago, joining Morgan Stanley Investment Management (MSIM) as managing director and global head of equity trading. On the surface, to many of Tierney's high-powered sell-side trading colleagues, the move may have seemed like a signal that he was looking to slow down in an easy job at a sleepy buy-side trading desk. But nothing could have been further from the truth.

As soon as he arrived at MSIM, Tierney says, he could see that the trading desk he was inheriting was in need of an overhaul. From his experience on the sell side, he knew how a trading desk should operate, the tools it needs to trade effectively, and the skills and motivation its people need to be successful traders. These essential ingredients were lacking on the MSIM trading desk, Tierney recalls.

Exactly how low was the bar when Tierney arrived at MSIM in September 2006? According to Tierney, when he asked his new team to define electronic trading, the collective response was "Liquidnet." Simply Liquidnet. Tierney was not amused. "I said, 'That can't be the answer because it's just one tool, not the entire toolbox,'" he relates.

In late 2005, electronic trading accounted for about 2 percent of MSIM's shares traded globally and about 10 percent domestically, Tierney adds. None of that was traded outside of Liquidnet. Within his first 60 days on the job, Tierney devised a document that mapped out the firm's new buy-side trading desk. The document, which the team refers to as "The Manifesto," was the beginning of a transformation of MSIM's global trading desk, a project that could create a new model for the industry.

Tierney immediately started introducing the MSIM team to electronic trading technology, including execution management systems, broker-dealer algorithms and DMA platforms. His goal, he says, was to remake the buy-side trading desk in the sell-side trading desk image, from tools to technology to mentality. Tierney says he has always believed that "If we just upped our consideration and investment in technology and analytics, we could become a considerable player pretty quickly."

But it's one thing to have a vision -- equally important is communicating that vision, getting executive buy-in and reinforcing the vision throughout the firm. "We've done the Trading Renovation presentation 50 times, and we still do it," notes Tierney, who stresses that there is "unwavering support [for the initiative] at the highest level, despite the fact that we're operating in a challenging environment."

The Trading Renovation initiative covers the entire life cycle of the trade, Tierney explains. The enormous task -- which will cost in double-digit millions over the two years of the project, according to Tierney -- has been broken into four main areas: standard order generation, virtual seamless trading, execution management and liquidity access, and data and analytics.

'Human Capital Upgrade'

To get started, Tierney needed a team that understood his vision and could help make it a reality. As part of a "human capital upgrade," as Tierney puts it, he made some new hires and assembled a mix of expertise in various areas, including analytics, project management, operations and technology.

"We all had the same general view -- not just one view and everybody gets behind it. We had the same vision that technology and analytics would be significant drivers of where the business was going," Tierney recalls. "If we could get our arms around it and get proper investment behind that, we could drive this part of the business to a different level."

To get to that next level, Tierney set to work restructuring the equity group, which previously had two business heads. Instead, he installed Elizabeth Brown as the single point of oversight for the entire equity trading operation. While Brown is located in Houston, where the firm's large-cap stocks trade, there also is a team located in New York, where the small-cap, program and real estate trading are housed. In addition, the U.S. trading team was pared down from 16 traders to 11.

In order to achieve its goal of operating more like a sell-side desk, the team needed better technology and a better trading process, according to Rob Shapiro, executive director, head of trading execution and analysis. "The buy side has to become much more aware of how they trade and take more responsibility for their order flow," he says. "This mandates a different type of trader, who is equipped with different types of tools."