Chase Manhattan's Custody Unit Pilots Crossing Service

Chase Manhattan is testing the crossing services waters with a low- tech pilot for clients of its domestic custody operation, says a source at the bank.

The pilot program, of unknown duration, is limited to transactions between Chase custody clients involving domestic securities. Pending reregulation, Chase is prevented from serving non-clients as crossing network participants.

Chase has hired Allan Gresack, one of Instinet's original designers, to work with custody clients on developing a crossing capability.

A behemoth among custodians, Chase Manhattan makes a lot of sense as the nexus for a crossing network. Chase is master custodian for approximately $450 billion of securities, and counts among its customers plan sponsors such as General Electric, AT&T, Amoco, IBM, General Dynamics, and the New York State Retirement Fund. Chase custody holds on deposit securities for these clients and can transfer them between accounts very quickly and cleanly.

Turnover of the $90+ billion in domestic securities on deposit with Chase custody exceeded 45 percent in 1986. A portion of this business may be tapped through an internal crossing capability. According to custody transaction summaries, one investment manager often buys what another sells.

Clients -- not systems -- create liquidity, so Chase's first priority will be to find out if there is enough interest among clients to support a crossing system. The pilot is intentionally low- tech, not only to control overhead, but also to inhibit technophobia.

The better part of the investment required for a crossing network already exists in the form of a massive internal database management system which gives custody officers online access to client-specific and transaction information. Holdings and transaction histories in the database can be filtered using a Lotus-like screening function.

Custody clients' buy and sell lists will initially be solicited by telephone. These wish lists will be stored on a microcomputer and matched against Chase's online custody lists to identify possible crosses and build a trading plan.

By sponsoring an institutional crossing service, Chase stands to gain in two ways:

(1) by leveraging the custody operation's vast investment in information systems technology, and

(2) by differentiating custody services in a highly competitive and price-sensitive service sector.

Many of the larger custodial banks must build the cost of advanced systems technology into their custodial services pricing. Lately, smaller, less highly-automated banks have been winning business away from their larger rivals on the basis of cut-rate pricing. This commodity pricing approach to custody services may cause other major banks to look for ways to squeeze added value from their investment in systems technology.

The service will be positioned as a cost-cutter for Chase custody's institutional clients who see crossing as a way to lower execution costs and eliminate market impact.

Not all of Chase's custody clients are expected to receive the venture with open arms. Many plan sponsors are reluctant to tell their investment managers where or how to trade. Long-standing soft dollar arrangements between money managers and their brokers may create resistance to crossing.