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05:53 PM
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Dear CIO...

Jonathan Beyman is chief of operations and technology at Lehman Brothers, as well as an executive vice president. In addition, Beyman has served as the firm's CIO since 2000.

Question: As it increasingly provides tools for algorithmic trading, pre-trade analytics and transaction cost analysis to the buy side, is the sell side disintermediating itself?

No. Those things you describe are the latest tools that we provide to our customers to help them accomplish their business goals. I would describe our business - the business of a sell-side bank - as, broadly, three things:

First, we provide liquidity to our customers and to the markets. We buy and sell assets, in the form of securities, loans, currency, real estate, commodities and, of course, derivatives in the form of options, swaps, futures, etc. We underwrite new debt and equity offerings, which essentially is a process of providing liquidity to an issuer and distributing securities in the marketplace.

Next, we provide risk transference capabilities. We structure ideas and or trades for our customers to reduce risk or to increase it where there's an appetite for it. This includes market risk, interest rate risk, foreign currency risk, credit risk and virtually any other kind of risk that exists.

Last, we provide value-added ideas in various forms, such as equity or fixed income research or, again, structured and derivative trades. On the investment banking side of our business, we provide ideas on such things as business combinations, or ways to unlock value from businesses through spinoffs or by divestitures, or ideas on financial restructuring.

These are the real services that we perform for our customers, and that ultimately is for what they pay us. Tools such as algorithms and pre-trade analytics are vehicles to facilitate access to the markets and to aid in decision making. If the tools that we provide are good, then we provide something of value to our customers, which may enable efficiency (for them as well as us) in the distribution channels of our business. That may lead to further consolidation of sell-side providers, in that efficiency tends to cause margin compression, and may eliminate high-cost providers. But I don't believe those tools fundamentally alter the value equation, nor will they lead to disintermediation of the sell side.

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