The Challenge: Auerbach Grayson & Company has built a brokerage business that spans 83 countries by partnering with local brokerages and building a 24X7 international trading system. Here's how the firm has conquered the many challenges along the way.
When it comes to most companies, building a global brokerage firm entails an elaborate network of branch offices, technology and staff; all under the same corporate umbrella.
However, you won't find that at Auerbach Grayson & Company Incorporated, a 35-person New York institutional brokerage whose tentacles reach into 83 countries. The firm has built its global presence not by opening offices and hiring staff, but by using the Internet and links to existing brokerage firms in foreign countries. The firm identifies one broker in each of the countries it looks to conduct business and pitches them on joining the network.
That method of expansion has provided Auerbach Grayson clients with access to almost 400 analysts covering about 2,000 companies around the world. It also places the firm fifth in the Nelson Information rankings of total analysts, behind firms like Merrill Lynch, UBS Warburg, Deutsche Bank and Salomon Smith Barney, but ahead of firms like Credit Suisse, ABN Amro, Morgan Stanley and J.P. Morgan.
"Auerbach Grayson is best described as a global brokerage," says David Grayson, managing director and co-founder of the firm. "We're specialists in the sale of foreign stocks to major North American clients."
While most firms look to expand into established markets - such as the United Kingdom, France or Germany, where Auerbach Grayson also has a presence - the upstart firm's focus is on emerging markets, such as Eastern Europe and Africa, where it covers 21 different countries.
He says what sets his firm's offering apart from other global brokers is that its bottom-up research comes from analysts who are on the ground and not parachuted in from a corporate head office."They bring a local point of view about business. There's no one else who has what we have," says Grayson.
The key to building the firm has been technology, he notes. It's what allows Auerbach Grayson to effectively gather and distribute its research. "In the early '90s, you weren't dependent on e-mail and didn't have the Internet," he notes. So distribution was paper intensive. Now, he says, it's simply a click of the button. However, the challenge is to "keep clients away from the delete button."
With a research library containing more than 40,000 reports, getting the right information into the right hands is key.
Jay Horowitz, an outside IT consultant who has helped Auerbach Grayson build its technology, says the traditional way of delivering research was to "dump as much in front of a buyer as you could."
Now, the firm has created client profiles and intelligent filters that allows it to quickly disperse reports to the relevant clients as they come in through the global network.
He says that working with firms from a range of first to third-world countries can be "challenging, depending on their level of automation. It goes from none, to a little bit, to a lot."
But research is only part of the equation. Auerbach Grayson provides its clients with executions of shares in foreign companies directly through its broker partners in the country where the shares trade. At the beginning, much of that was done through voice and fax. The Internet is changing that.
In fact, Auerbach Grayson is preparing to take international trading to the next level. In the fall, the firm is part of a group that will launch AXES, an electronic cross-border-trading platform that will provide execution and clearing of securities in virtually every market, in local currency.
"Our clients are all sophisticated institutions who trade not only the local stocks, but settle in the local currency. There are very few systems around that are true multi-currency systems. What we did was build a proprietary system that permits us not only to issue contract notes or confirms in any one of 83 currencies but go out to a number of different decimal points," says Grayson.
In Turkey, for example, the system must accommodate 12 or more decimal points. Grayson adds, "We found we had to do pretty much everything from scratch."
AXES will provide 24-hour online trading for members of Auerbach Grayson's international network. Each of the partners was invited to buy an equity stake in the system and 50 firms have coughed up the cash.
Grayson says that AXES will "greatly enhance the efficiency of the current order-entry, trade-execution and settlement-monitoring process for cross-border trading." Moreover, it will allow each of the network partners to trade in the other member's markets.
As well, some of the network partners are licensing the technology for other regions. For example, the Moroccan partner, Upline Securities, will use the system to expand into Kuwait and Saudi Arabia, two areas where the Auerbach Grayson network currently has no coverage.
To build the system, Auerbach partnered with technology company Cross Border Exchange Corp. of New York. Horowitz says the brokerage firms will interface through AXES and send orders via FIX messaging. Firms that are not FIX compliant are building Web-based front ends.
Horowitz says the consortium has jumped a number of hurdles. One has been building a system that accommodates more than 80 different markets, each with its own trading rules.
One of the biggest challenges was security identification. "Each of the 80 different countries refers to securities in a different way," he says. That meant building rules to minimize the risk that someone might purchase the wrong security.
At press time, Auerbach Grayson was testing the system, which was originally supposed to be launched earlier this year.
Gene Kim, an analyst at Financial Insights, says that, "Two years ago, they couldn't have done this and been taken seriously." However, with the rise of electronic trading and the attention on straight-through processing, it makes for an interesting utility play, he says. "They may be a little ahead of the curve or right on time. The real question becomes, are they in the (countries) where people want them to be?"
Kim's colleague, Damon Kovelsky, suggests that "99.9 percent of buy-side firms are not interested in trading in a lot of these markets." A pension fund with trading exposure in Tunisia might raise eyebrows with its plan members. "I don't think they would be too happy about that."
Grayson's focus is on adding to the global network. Next on his list? Baghdad. As of June, the exchange there lists 116 stocks with market capitalization less than $20 million. However, as the country rebuilds and begins trading internationally again, he expects the exchange to play a larger role in the economy. "We want to be there at the start."