Neil Leonard spends much of his workday roaming a trading floor abuzz with salesmen bellowing back and forth, phones ringing, and the chatter of TV monitors tuned to financial news. Bottles of aspirin and photographs of children or a spouse are jammed between many computer or television screens.

Though mortgage trading has become a thing of the past for some firms, the action at Lehman Brothers-where Mr. Leonard is managing director of mortgage- and asset-backed operations-is as hot as it ever was.

HSBC Securities, UBS Securities, Chase Securities, and Donaldson, Lufkin & Jenrette have all trimmed or closed their mortgage-backed securities operations in 1998.

Lehman, he said, is one of only a few that have the size to persevere in the current environment.

The market, he said, is beset by a "struggle between a desire for liquidity and at the same time an increase in information, technology, and quantitative skills."

Increasingly, the ability to "more finely segment each aspect of mortgages" has become a key to success, he said.

The high cost of trading mortgage securities and the smaller margins that characterize the market have made it impractical for smaller operations to continue, experts say.

A wave of refinancings and stronger markets in asset-backed and commercial mortgages have also persuaded some firms to de-emphasize mortgage trading.

But the top five underwriting firms, as ranked by Securities Data Company-Salmon Brothers, Lehman Brothers, Merrill Lynch, Bear Stearns, and Morgan Stanley-have stayed upright.

Such full-service broker-dealer firms have market resiliency because they can combine the latest in technological and analytical tools with their homegrown market sophistication, experts say. Broker-dealer operations also can offset losses in one division by gains in another without having to close the doors on one sector because of a market downturn.

Increasingly, the top players are buying securities and holding them until another big buyer is found, said Shubh Saumya, a manager in the securities practice of Mitchell Madison Group in New York. This has made the business more risky, making it essential to use hedging strategies, he said. The positions that firms hold, and the typical transaction, have gotten larger.

"Because the number of buyers has shrunk, Wall Street has increasingly given up the notion of a bid-asked spread," Mr. Saumya said. Though Wall Street's role is to provide liquidity, it has been "searching for liquidity itself because it has been harder and harder to find buyers."

Big investors, such as Pimco, Blackrock, and other hedge funds, have become very powerful. Traders need the hedge funds and large institutional buyers for liquidity. But hedge funds have a lot more flexibility than Wall Street traders, Mr. Saumya said.

Managing directors for mortgage trading operations are challenged not only to make money every trading day but to anticipate the direction and the risks of the bond market. To meet this challenge, mortgage trading floors of Wall Street firms rely heavily on research and modeling.

Computers, televisions, and financial news information systems are omnipresent on trading floors. And increasingly, people with doctorate PhD degrees and mortgage research backgrounds are being tapped to run trading desks. The level of sophistication and technology on the buy and sell sides has also trimmed margins.

"There is a lot more investigation into the performance and price path of a security than there was in the past," said Jeffrey A. Mayer, senior managing director at Bear Stearns. With narrower margins, effective hedging helps firms to preserve profitable margins, he added.

"The market has become a lot more efficient. We're seeing wider retail participation. And as a result we're trading for smaller margins," said Mark I. Tsesarsky, managing director at Salomon Smith Barney. The smaller bid-offer spread is expected in a more mature market, he added.

A $100 million trade used to be big, Mr. Mayer said, but $500 million trades are now seen regularly, as well some that exceed $1 billion.

"The consolidation of banks and insurance companies and even money managers has created larger-size trades," Mr. Mayer said.

Trading operations mix technology and trading experience to set strategies. "To participate in the market in a meaningful way, you have to transact and hold larger positions," Mr. Mayer said. "With more sophisticated analytical tools and seasoned traders, we feel that our risk profile does not necessarily increase."

At Lehman Brothers, Mr. Leonard, 39, oversees 35 traders from the commercial, asset-backed, pass-through, CMO, derivative, adjustable-rate mortgage, and whole-loan trading units.

The average monthly trading volume at Lehman Brothers has grown from $50 billion in 1995 to $80 billion in 1997, and Mr. Leonard projects $90 billion for 1998. "Even with the increased segmentation, the market has been able to remain tremendously liquid," he said.

Lehman Brothers is the second-biggest Wall Street underwriter, with $63.9 billion proceeds and 12.6% market share, according to Securities Data Company.

Mr. Leonard began his career at Lehman Brothers as an associate in mortgage finance after earning his MBA at Columbia University. He moved to the trading floor, where he traded project loans, residential whole loans, commercial mortgages, pass-throughs and CMOs, and ultimately became a "player-coach," someone who manages and trades. In 1995 he headed all residential mortgage trading, and since 1997 he has managed mortgage- and asset-backed trading.

"What's exciting to me is the varied skill sets and opportunities the mortgage market has," he said. Opportunities range from very liquid flow- oriented products like pass-throughs to enormous deals that take up to a year to execute, he said.

Like other managing directors, his days are "opportunistically oriented," driven by market activity, he said. He rotates between the three trading desks on Lehman's fixed income floor, surveying the mortgage landscape.

Mr. Leonard said he still gets an adrenaline-rush from being involved in the market every day. "My expectation is that tomorrow when I come in, there will be something new and different and challenging."

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