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Fidelity Lifts Veil on Supermarket Trades

Fund companies participating in the supermarket of Fidelity Investments of Boston will soon be alerted to orders and redemptions as they occur. This is a departure from the current system in which funds must wait for end-of-day reports.

Fidelity has developed Internet-based software for mutual funds in its FundsNetwork Xchange to allow them to see orders as they occur. Fidelity claims to be the first supermarket to offer such a service.

"Getting trades intra-day is terrific, substantial information because it gives fund portfolio managers an upside on market timers with their hot money, as well as any other large movements," said Richard Sincere, president of Sincere Holdings, a mutual fund consulting firm in Worcester, Mass.

Fidelity will also disclose the names of the advisors and broker/dealers making the trades, so that if a fund company becomes dissatisfied with the rapid movement of money into and out of a fund by such a client, it could contact the client, said Matthew Sadler, senior vice president for Fidelity FundsNetwork Xchange. Or, the fund company could simply contact FNX and ask Fidelity to block trades by certain customers, Sadler said.

If it is an individual, retail investor who is making the trades, however, Fidelity will not reveal the name of the investor, Sadler said. Such trades will only be identified by a numerical code. Should it become apparent to a fund company that a certain retail investor is moving hot money in and out of a fund, the fund company will be able to instruct Fidelity to block trades by the entity, Sadler said.

Right now, Fidelity only reveals the identity of institutions making orders in monthly reports, Sadler said.

Knowing about big trades in advance, before the close of a trading day, is valuable enough, Sincere said. However, also identifying the advisors and broker/dealers behind the trades is important information, he said.

"It will be very valuable information for firms to know who the advisors are behind the trades," Sincere said. Other supermarkets protect traders from having this information revealed to fund companies, he said. If Fidelity tells the funds in its supermarket who is behind a large or questionable trade, the funds' portfolio managers and marketing executives will be able to follow up with questions, Sincere said.

"If you see market timing, or if someone puts in a few million dollars, you might want to give them a call," he said.

Fidelity is testing the service among 20 funds in its supermarket of 360 fund companies this month, Sadler said. Fidelity plans to expand the program in May to a much broader group, he said. Fidelity is providing individual, password-protected trade home pages to each fund company over the Internet. These sites list each fund in a company's fund family and aggregate trades under three columns - orders for $1 million or more, orders for $100,000 to $250,000, and orders for less than $100,000. The sites also show a total for orders less redemptions, so that at any one time, a portfolio manager or other mutual fund executive can see the net activity, Sadler said.

By clicking on any individual trade, the mutual fund executive will then be able to see the identify of the institutional client behind the trade, or the account number of the retail client, Sadler said.

Although Fidelity has incurred some costs in developing and maintaining this service, Fidelity believes this high level of service will result in better trade-order management and, therefore, performance, for the funds in its network, Sadler said. And this gives Fidelity FundsNetwork Xchange an edge over other supermarkets, he said.

The effort will be worth it even if it only improves performance for each fund by a few basis points, Sadler said.

This new service, which Fidelity calls Real Time Trading Activity, "has been met with great enthusiasm," Sadler said. However, Fidelity declined to name any of the firms testing the new service.

Charles Schwab Investment Management of San Francisco is also testing a web-based service, similar to Fidelity's, that gives a handful of funds in its supermarket minute-by-minute information on trading activity, according to Schwab.