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Global Trading at SSgA

Global Trading at SSgA. Portfolio managers and traders work together to implement our ideas and grow wealth. Global trading network Three regional trading desks 20 trading professionals; 24 hour trading 4000+ trade tickets per day on average

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Global Trading at SSgA

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  1. Global Trading at SSgA Portfolio managers and traders work together to implement our ideas and grow wealth • Global trading network • Three regional trading desks • 20 trading professionals; 24 hour trading • 4000+ trade tickets per day on average • Seek all sources of liquidity to minimize transactions costs • Internal/external crossing • Futures, EFPs, Swaps • Agency and principal trades • Regular execution analysis $240 billion in equity transactions - 2005 Global Trading Group London Boston Hong Kong

  2. Displayed • Limit orders in NYSE Limit orders in ECN electronic limit order books The ‘core’ challenge facing all buyside traders Only a small faction liquidity is displayed How do we get efficient access to non displayed liquidity? • Non-displayed at market venue • NYSE floor brokers • ECN “reserve” (non-displayed) orders • Non-displayed at broker-dealers • Agency orders held by program/cash trading desks • Non-displayed dealer liquidity Exchange Floor Broker Broker Dealer • Non-displayed at investors • Orders at buy-side desks • “Latent” liquidity Investor

  3. Many execution choices available… SSgA Trading utilizes all execution venues Algorithmic Trading Direct market access (DMA) Portfolio trading Single-stock trading • VWAP • Implementation Shortfall • Participation • Small-order spread-capture (SPI) • Broker-sponsored (Triton) • ECNs (e.g. INET) • Crossing networks (e.g. Liquidnet) • Agency • Capital request • Agency • Capital request High touch Low touch Portfolio trading, algorithmic trading and DMA may overlap: e.g. portfolio trades may execute algorithmically through DMA

  4. How to choose? • Direct costs are a small component of trading costs • Commissions • Trade impact • Opportunity cost of slow executions • Opportunity cost of missed trades • Should not choose low touch over high touch based on commissions alone! Indirect costs Indirect costs are 89% of total trading costs [bps] Plexus “Iceberg” trading cost estimates1 49% Commissions are 11% of total trading costs 22% 77 bps 18% 34 bps 29 bps 17 bps 1. Trading cost estimates as defined by Plexus, e.g. trade impact: execution price compared to price when buy side sends order to executing venue. Source: Wayne Wagner ( Plexus), testimony to House Financial Services Committee, 3/12/03.

  5. Commissions Indirect costs Shifting trades from high to low-touch • Shifting the wrong trade • Increase in indirect costs outweighs reduction in commissions [bps] Increase in indirect costs Reduction in commissions • Shifting the right trade • Little change (or even reduction) in indirect costs, reduction in commissions [bps] No change in indirect costs Reduction in commissions Hypothetical examples

  6. Algorithmic Trade Spectrum Each investment strategy requires a custom solution Market Impact Information Content / Alpha Passive Enhanced Active Hedge Fund

  7. So far so good… Key observations on commission levels and total transaction costs • Commission levels continue to decline • Increased use of ‘low touch’ offerings • Direct Market Access and Algorithmic Trading • Transaction costs continue to decline • Proprietary t-cost measurement • External third party analysis Optimal mix of low and high touch continues to be a challenge.

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