- September 08, 2005 07:25 PM EDT

BODY:

I was recently at dinner with a bunch of girlfriends to say goodbye to our friend, Evlyn, who is moving to Greece for two years. So it goes sometimes when your spouse changes jobs. She talked about leaving behind her career as a lobbyist and the fact that she can't speak Greek. But she also talked about the opportunity to live in another part of the world, learn a new language and have her two young sons better appreciate their father's culture.

It isn't just individuals that change their coordinates; companies do it, too. In this issue's cover story, Senior Editor Tony Chapelle describes a geographic risk being taken by Bear Stearns' Steve Dantus, head of the company's broker division. In a bid to increase the contribution his unit makes to the firm's revenue, Dantus has broken with prior practice and opened satellite offices for Bear outside of Seattle and St. Louis. It's only one of the steps being taken by Dantus, who has the advantage of working for a company that hasn't had an unprofitable year since the mid-1920s. Our profile, "Bear Stearns Extends Its Reach," starts on page 58.

This issue, we examine several other changes, including the one that inevitably accompanies a shift in leadership. Now that Rep. Christopher Cox (R-Calif.) is in line to replace William Donaldson as head of the U.S. Securities and Exchange Commission, some industry trade organizations hope (and investor groups fear) that Cox, a self-described opponent of big government, will put the reins on regulations that have swept the financial-services industry. So, in "Will Cox Clash With SEC Enforcement Chief?" (page 20), we question how well he will work with the SEC's Linda Chatman Thomsen, who is overseeing the agency's ongoing Enron investigation.

We also look at another powerful regulator, the New York Stock Exchange's Susan Merrill, in "Street-Smart Enforcer" (page 52). A change agent herself, Merrill couldn't be at the NYSE at a more challenging time-from the creation of its independent regulatory arm to its plans to merge with Archipelago. Freelance writer Carol Vinzant talks with Merrill about her unusual career path, beginning with her early foray into acting, right up to her current starring role-policing Wall Street.

Fees have been a big focus lately, but not every development involving them has been positive. Take Exchange-Traded Funds, whose low costs have made them popular with retail clients but have shortchanged brokers. Neil O'Hara notes in "The ETF's Disadvantage" (page 37) that commission-based reps are having a hard time making the same money on ETFs that they make on mutual funds. But it's possible to combine the two in a manner that preserves more of a broker's compensation.

Finally, change is also about goodbyes. This month, we have a personal one. After more than three years with On Wall Street, Editor-at-Large Dan Jamieson is leaving. In his Broker Advocate column (page 14 this issue) and in his other writings for us, Dan has championed the individual adviser and lambasted employers and regulators alike. We'll miss his strong opinions and wish him the best.

Frances A. McMorris

Executive Editor

frances.mcmorris@sourcemedia.com

http://www.onwallstreet.com http://www.sourcemedia.com

BODY:

Hardly anyone outside the elite cadre of Wall Street lawyers had heard of Susan Merrill when she was tapped to head up enforcement at the New York Stock Exchange last summer.

But during the last decade, if there was trouble on the Street, Merrill was probably representing somebody involved in it. As a defense lawyer at law firm Davis Polk & Wardwell, she has worked on scandals that included Joe Jett, the analyst conflict-of-interest debacle and the ImClone Systems insider-trading case.

Dennis E. Glazer, co-head of litigation at Davis Polk, has worked with Merrill since she started at the mammoth firm out of law school, right until she left last summer. Glazer says that while she worked on all the high-profile cases, her biggest victories were the ones that nobody knows about. That's because she was able to work out the issues quietly with regulators. And that's the ultimate victory for a defense counsel-convincing authorities not to press charges.

Merrill will only acknowledge that she had "fortunate wins in that regard." Asked about her role in any of those cases, she'll only say that it falls under attorney-client privilege.

It's the irony of the securities defense business that the public never knows your biggest wins, says Gary Lynch, who-before joining Davis Polk to defend many Wall Street firms-was director of the Securities and Exchange Commission's Enforcement Division when it went after the likes of Michael Milken, Ivan Boesky and Drexel Burnham Lambert. "It's just a fact of life," Lynch says. "It doesn't go on your resume."

What is likely to go on Merrill's resume is her tough talk, backed by even tougher action. Last year, the NYSE fined Morgan Stanley $19 million for failing to send customers prospectuses on new stock offerings as well as other violations. The brokerage giant was hit with the fine despite cooperating with the exchange. At about the same time, Merrill had reportedly sent a letter to 25 other brokerage firms about the prospectus problem.

The fine-the largest ever imposed by the NYSE on its own-was levied within a few months of Merrill taking her job at the Big Board.

Merrill didn't come to the exchange via another regulatory agency or a prosecutor's office. Her mentor, Lynch, followed the traditional pattern of going from low-paid regulator to high-paid defense attorney. Yet Merrill has a knack for taking detours. While growing up in Baltimore with two older brothers, she had little exposure to the stock market. Her mother was a legal secretary, and her father was a manager at Exxon. He would follow his company's stock in the paper, but he never considered buying others. Merrill herself bought a few individual stocks when she started saving for retirement but was never an avid trader.

At first she wasn't planning to be a lawyer. She arrived in New York to be an actress after graduating from the University of Maryland cum laude in 1979, appearing in shows such as Landscape with Waitress. "I know you're familiar with that one," she jokes.

After a few off-Broadway plays and tours, she decided to look for another career. "I'm a person who likes to work hard and find a reward for that hard work," she says. "Acting doesn't work that way."

She thought back to the lawyers her mother had worked with and decided to go to Brooklyn Law School. She worked her way through school waiting tables in Manhattan at Cajun Restaurant on 16th Street and Eighth Avenue. She fell in love with the chef, Joe, and they married.

After graduating summa cum laude in 1986, Merrill clerked for an appellate judge for a year before starting at Davis Polk. She didn't even work in securities law until she returned from having her first baby in 1989.

As her career heated up, her husband Joe decided to stay at home to raise the kids. "He's the one that makes all this happen," says the blonde-haired, brown-eyed lawyer, an energetic and fit woman of 48. They now have two kids-Max, 15, and a daughter, Esme, 11-and a pug puppy, Lady Bug.

When Merrill returned from her first maternity leave, Davis Polk had just hired Lynch, fresh off his stint at the SEC chasing insider traders and market manipulators. "I learned everything about the securities business and enforcement from Gary Lynch," Merrill says.

She was one of several young associates working with Lynch. Their first big public case was the investigation of Jett, whose intricate transactions had made an $80 million loss look like a

$300 million-plus profit. Jett's firm, Kidder Peabody, hired Davis Polk to write a report on how this could have gone on for so long. Jett claimed his bosses knew what he was doing and used him as a scapegoat because he is African American. Jett wouldn't talk with the law firm.

Instead, Merrill interviewed Jett's co-workers to determine how their division worked. Lynch was impressed with her eagerness for more responsibility. Merrill soon adapted to the media glare and began heading up her

own cases.

"A lot of her effectiveness was in getting things resolved effectively, without a splash," Glazer says. "When an agency knows they can trust the outside lawyer, they feel like an investigation or an issue is in hand, and they don't have to over-worry that a lawyer is misleading them."

At the same time, Merrill served as a role model for balancing work and family life, says Denis McInerney, a former federal prosecutor and now a partner at Davis Polk. Merrill, he says, would come into the office at "an ungodly hour" and then work non-stop all day in order to make it home to Rye, N.Y., in time for dinner with her family. She would finish up any remaining work at home. She also made sure lawyers at the office got to know

each other personally and professionally. Sometimes, McInerney says, Merrill would grab a few young associates and take them out for lunch, asking them about their lives and families. "It's a fairly rare quality of a lot of litigators you see in the world, and it's a critical part of her success," says McInerney.

In fact, Lynch says, one of the traits that makes Merrill successful is her ability to put both corporate clients and regulators at ease. Her clients included firms that traded treasury bonds after the Salomon Bros. scandal, Credit Suisse in the analyst probe, and ImClone during the insider-trading probe that eventually landed the company's founder-as well as homemaking diva Martha Stewart-in prison.

Her fierce and deft defense of Wall Street firms raised some concerns when she started last year. She had to recuse herself for a year from all of the cases her firm handled and in perpetuity from anything she worked on personally.

Bill Singer, a securities lawyer and longtime critic of self-regulation, believes the exchange-by hiring a lawyer who defended big firms-"may have a bit of a Harvey Pitt problem." Pitt was a widely admired, experienced securities defense lawyer who floundered as President Bush's first SEC chairman.

Merrill says it didn't bother her to switch sides because "I always do what I feel is right in any situation-I never advocated any position I didn't feel was right." Sitting on the regulator's side offers her a broader view and a better chance to help protect individual investors, she says.

But looming larger than the question of whether someone who has been defending the industry can handle the enforcement job is whether the exchange itself is up to the task. Wall Street has always insisted that people close to the business are the ones best qualified to understand its nuances and police it. That closeness, however, continually raises the specter of conflict of interest.

Merrill is part of a crew brought in about a year ago to beef up regulation under Richard G. Ketchum, the Big Board's chief regulatory officer. Ketchum, an SEC veteran, also used to regulate the Nasdaq before he became its president. Merrill was one of the first hires for Ketchum, who joined the NYSE about a year ago. He started with a regulatory staff of about 600, hired 60 by the end of 2004 and plans to add 80 more this year. This year, Merrill's enforcement division is slated to grow to 188 staffers-a 28% increase from '04.

Ketchum first worked with Merrill-then a partner at Davis Polk-when the Nasdaq hired her to work on their merger with the American Stock Exchange.

"It was clear to me from the start that she shouldn't be a partner in a law firm," Ketchum says. "She was made to be in a self-regulatory organization protecting investors." The word choice seems odd: Does anyone grow up wanting to be a self-regulator? But it reflects Ketchum's-and Wall Street's-staunchly held belief in self-regulation.

Merrill and her staff watch over the trading exchange from modern digs across Wall Street. Merrill has a sunny corner office decorated with artistic photographs and family photos. The building, 14 Wall St., features a penthouse where J.P. Morgan once lived-it has since been turned into a fancy restaurant favored by traders-and lorded over the exchange. (The exchange's attempt to ward off federal regulation of stock trading dates back to the days when the House of Morgan virtually ran the exchange until Congress created the SEC in 1934.)

Right now, for Ketchum and Merrill, what's at stake is nothing less than whether the exchange can hang onto its justification for policing itself.

It's getting harder to rationalize having a separate self-regulator when so much of the trading is handled by computers and off the floor. Roughly 20% of the volume in listed stocks now goes to other electronic markets. In one week near the end of the first quarter, a whopping 71.4% of the exchange volume was in program trading, the massive portfolio shifts done by computer.

People still think of the building at Broad and Wall-the cacophonous floor where men run around (as they have for the last 213 years) with slips of paper and funny-colored coats-as the center of the financial universe. In reality, however, more than 99% of the order flow is now routed electronically.

The debate over who will regulate the floor heated up along with the market in the 1990s. For-profit electronic communications networks pursued the near duopoly of the NYSE and the Nasdaq. The mutually owned markets contemplated going public to compete. In the summer of 1999, then-NYSE Chairman Richard Grasso envisioned going public by that Thanksgiving.

That, of course, still hasn't happened. But the prospect raises the question of whether these markets could compete and regulate, too. Recently, the NYSE said it plans to merge with Archipelago, a Chicago-based ECN that handles a large volume of options trading. Many see the move as the exchange hedging its bets as the trading world becomes increasingly electronic.

Merrill says the move, if it goes through, will not significantly change things for her enforcement staff. Instead, she expects the merger to push the whole regulatory staff further down the road it's headed-towards greater independence from the exchange.

The road went down its most decisive path in December 2003, when the SEC approved a new structure for the exchange. The result was Ketchum coming in as chief regulatory officer the following spring. He answers to a committee on the exchange's board-not the NYSE's chairman.

Merrill is one of three executive vice presidents who report to Ketchum. Grace Vogel heads up the largest division, Member Firm Regulation, which examines companies on an annual basis, while Robert Marchman leads the Market Surveillance unit, which looks for improprieties in trading.

Both the NYSE and the Nasdaq have gone through convulsions towards building a firewall between the market and its regulators in the last decade. But that hasn't necessarily assuaged the public's sense of distrust following a decade of scandals and the bursting of the tech bubble.

For the Nasdaq, the big turnaround came after a 1994 study that found that Nasdaq market makers must be colluding because too many prices wound up at fractions of 1/2 and 1/4-and not at smaller, in-between increments. Eventually, the SEC demanded that the NASD spend $100 million extra on enforcement during the next decade and firms return $1 billion to investors. (At the time, Ketchum was heading up Nasdaq.)

It was a significant development for the self-regulation debate, forcing the NASD to create a division called NASD Regulation. By 1998, it had also launched a massive Web site so investors could easily look up the records of their brokers.

In many ways, the ruling catapulted the NASD past the NYSE in investor protection and responsive corporate structure. After steering Nasdaq through strengthening and separating out its regulatory division, now Ketchum is leading the charge at the NYSE.

But many challenges still remain. In April, the SEC slapped the exchange with an official censure, saying that even after all of the earlier fuss over floor brokers, the Big Board still had "materially deficient" surveillance, investigation and enforcement arms. By trading ahead of big orders or "interpositioning" their own accounts between two orders that would otherwise match, floor brokers had cheated the public out of $158 million, according to the SEC.

Between 1998 and 2003, the Big Board knew or "should have known that specialists were repeatedly engaging in interpositioning and trading ahead conduct," the SEC said. The federal agency's simultaneous administrative proceeding against 20 former specialists painted a picture of traders feeling impervious to scrutiny.

The SEC order also cited many ways the exchange had failed. First, to detect improper trading, the NYSE used a computer program designed in the early 1980s, when trading was slower and spreads were wider. Although the NYSE's own reports recommended adjusting the program, the system only caught the most obvious violations.

Even then, the SEC said, the exchange didn't closely investigate or properly punish all of the flagged trades. In September 1999, for example, the NYSE didn't investigate a bad trade that cost an investor $37 because it "wrongly assumed that specialists" wouldn't engage in illegal conduct for such small change. The SEC notes that "in fact, various specialists repeatedly engaged in small scale unlawful transactions" adding up to "tens of millions of dollars."

The SEC ordered the exchange to spend $20 million to hire an auditor to evaluate the exchange's regulatory system every two years through 2011. It will also have to start a pilot video- and audio-surveillance program.

If there was one bright spot in the incident for the NYSE, it was that the SEC said Merrill's enforcement division had helped with the investigation-though she had to stay out of it since she had previously defended Fleet on the issue. More importantly, the agency said the exchange had already fortified its regulatory functions since the probe.

All of the focus on whether self-regulation works is why Ketchum needs someone like Merrill, one of the top securities lawyers in the country. Merrill won't say whether she had to take a pay cut for the position. And the exchange won't comment on whether it, as a self-regulator, was able to spend a little more than the SEC could to buy the top talent.

It's too early to tell whether the changes will be enough to satisfy regulators. There's certainly no wide public uproar to get rid of self-regulation, but there are a few opponents.

Singer, the lawyer who is critical of self-regulation, says that New York Attorney General Eliot Spitzer is "the new metric" that self-regulators have to compare favorably against. Unless the Ketchum team can make a quantum leap of improvement, Singer doesn't believe anything they do will be enough to hold onto self-regulation in perpetuity.

But Merrill's job, as she sees it, is not only to head up enforcement at the NYSE, but also to convince federal regulators and Congress that the exchange is still up to the task of policing its traders. "I think my role in the debate is as an advocate for the New York Stock Exchange self-regulation program, which I think is an excellent program that I would hate to see diminished," she says.

Susan Merrill, the New York Stock Exchange's executive vp of enforcement,brings her expertise as a securities defense lawyer to the self-regulatory side.

Merrill learned everything about the securities business and enforcement from Gary Lynch, who steered SEC Enforcement when the agency went after the likes of Michael Milken, Ivan Boesky and Drexel Burnham Lambert.

http://www.onwallstreet.com http://www.sourcemedia.com

BODY:

Where are crude-oil prices headed? If you ask some experts who follow energy-market fundamentals, they'll tell you that they have room to move even higher. But technical analyst Jack Adkins, director of quantitative strategy in North America for Action Economics, has a different view. He thinks charts that track price patterns for crude show that oil prices are about to fall precipitously.

Adkins predicts that oil, which now trades just shy of $41 a barrel, will rise a bit further, perhaps as high as $43, topping its all-time high of $42.45 set on June 2, only to then collapse. This time he thinks it will drop back as low as $28. He thinks the answer lies in the pattern shown on the charts and other tools, especially an analytical technique known as the Bollinger Bands.

Of course, some detractors of technical analysis think reading price charts to predict future changes isn't far removed from examining tea leaves. In the oil market, they prefer to look to the real world and its news events and production and usage trends. But Adkins can claim some recent success, as his approach correctly predicted a drop in prices in May.

Adkins recently spoke with Carol Vinzant, editor of BusinessWeek's Stock Trader e-mail newsletter, about his expectations for crude-oil prices and how he interprets the charts to arrive at his forecasts. Edited excerpts from their conversation follow:

Q: What made you predict the price would fall this spring?

A: We had $43.80 [per barrel] as the high-limit projection [in Action's May report] and it came up just shy of that. I used more or less the same analytics I'm using now. Part of the scheme is relative value to the CRB, the Commodity Research Bureau index [a composite index of various commodity prices]. And we anticipated higher output from OPEC before their [June 3] meeting actually occurred, and they said they would boost production.

Q: What makes you think oil prices are going to fall now?

A:The oil producers are selling into the rally and locking into the high prices. The dominant player in the market has been the hedge funds. They're betting that there's going to be a disruption in supply and that there's no room [in the market] for supply disruption. I think that negative events are built into the market, and if the risk premium doesn't need to materialize, hedge funds will need to cover the positions [sell because the price is dropping].

If prices do begin to fall, it will trigger more aggressive selling, and they'll empty their positions. My contention is that a lot of that stuff is baked into the cake, and if it [a terrorist attack or other disruptive event] doesn't happen, prices are too high.

Q: You mention in your report that you think the "risk premium," what the market has added to the price of oil fearing a terrorist attack that hits oil supply lines or other geopolitical events, is about $5 to $8 a barrel. You think that's too high?

A: The market perceives there's no room for any kind of supply disruption. If the Russian government decides to take over YukosYKOCF.PK, the feeling is that production would not be as robust under a government-run company. Plus, the government here [in the U.S.] keeps issuing these more or less vague terror warnings, and that keep the risk premium in place. The premium is so high, at $5 to $8 a barrel, that [the current high price] is a fragile thing to hang your hat on if you're bullish.

Q: So that means that even if there's a big terrorist attack, you would not expect oil prices to go up, because the possibility is already built into the current price?

A: It depends on the event. Rather than have a $5 to $8 jump if something did happen, it's built-in. If something catastrophic in terms of supply were to occur, I don't think there'll be that much of a reaction. You might get 50 cents, you might get as a much as a dollar. I don't think a catastrophic supply disruption is worth more than 50 cents or a dollar.

Q: What do the price patterns show?

A: It's a double top [a chart pattern of two peaks, followed by a decline]. That's the pattern that's developing, in my view. What is, in my opinion, most likely is that we're going to retest the early June high of $42.45. It could possibly marginally exceed that, and $43 would be kind of a top end. It might go a little above $43. Then we would have two highs a couple months apart, and prices would be expected to back off.

That is the classic double-top pattern. Typically speaking, it's a relatively reliable pattern, especially at the extremes. And lately, it has been much more difficult for the price to get from $41 to $42 than it was to get from $35 [where it dropped in June] to $41. That's increasing my confidence. The market is laboring to make upticks.

Q: You also use the Bollinger Bands. [This tool, invented by John Bollinger, plots one band above and one band below a security price's moving average, typically the 30-day moving average. The bands are spaced at two standard deviations from the moving average. The area in between the bands is considered the normal, expected price range, while the area above or below the bands is considered extreme.] How do you use them and what have they told you?

A: What most people use the Bollinger Bands for is as a short-term trading tool. More often than not, they use the 30-day or 21-day moving average because that covers a month. Whenever prices move, you get a quick surge in the bands. Many markets will drift sideways between those bands, and that's considered range trading. When you break out above the band, the market will stall, and it will move back to the range. But then what you're supposed to do is buy. It's an illustration that sentiment has turned one way and is going to continue to move that way.

I prefer a different application. If you expand the application and look at the longer term, you see extremes in the marketplace. It does a reasonably good job of pointing them out. I like the 260-day moving average. It's much more rare to get to two standard deviations of the one-year moving average than it is of the one-month moving average. It's a fairly rare occurrence.

The way to verify [the price pattern] is the Bollinger Bands. Whenever you get two tests of the band within a few months of each other -- it's very rare -- it increases the potential for a double top. It's flirting with the band for the second time within two or three months. Whenever that happens it's telling you, in my interpretation, that there's a high likelihood that a buying climax is being achieved and that we're going to get a sharp reversal.

What it tells you is that on a breakout the market will slip back [the price will drop to inside the bands], but that there's some fairly strong buying. It doesn't tell you to buy when the price goes above the upper band, but it does tell you a strong enough buying surge is going on. It's telling you the market should settle back to the moving average. It's essentially saying: "Wait for the pullback."

Q: What other valuations do you use?

A: I take the crude oil and a very common relative valuation, the CRB index. You take the beta [a volatility measure] of a stock and its performance over some period of time. In this case, we are using beta of crude oil relative to the CRB index over three months. That's how you get an alpha [a measure of actual performance vs. expected performance]. You see whether crude oil has risen or fallen relative to its general index. Crude oil has been going up more than the commodities in the general index. The rally in metals and grains this year has pushed the CRB index into an uptrend. Crude has been a big part of that as well. There has been some overall strength in commodities in late 2003 and 2004.

How low do you think oil prices could drop?

A: What I'm most comfortable saying is that we'll get a drop back to $34. That is the midpoint of the Bollinger Bands. If the price breaks $34, there's likely to be a bear squeeze that will drop [crude oil] stocks down to the $28 range. If the price drops below $34, it triggers another wave of selling.

BODY:

Ideas for saving money on soaring energy bills typically range from the obvious to the inconvenient. Insulate your water heater? Been there, done that. Take shorter showers? Yea, right. Carpool? No thanks.

Even though gasoline is above $2 a gallon nationally, experts say it would take a price above $3 for drivers to really change their gas-guzzling ways. Likewise, most people already know that diligently turning off lights and insulating the attic will reduce energy bills. But with heating and electric costs rising so rapidly, a new sense of urgency may be just around the corner.

There are some new (and not so new) ways to cut back on your energy consumption that will help the environment in the short run, save you money in the long run, and are, well, hot (or cool) in their own right. Here are 10 ways to save energy that you probably haven't thought about:

Buy a hybrid car. Have you ogled a sleek new Toyota Prius or Honda Insight? Known as hybrids, these Japanese models combine a traditional combustion engine with electric power. Along with a sleek design, they offer high mileage (about 60 miles per gallon in the city) and low emissions. And given their increasing coolness, the price isn't bad either: Each has a sticker starting around $20,000.

Second chance for diesel? O.K., so finding a gas station with a diesel pump can be vexing sometimes. But for a whole range of European luxury cars (diesel fuel is widely available in Europe, where gasoline costs $4 a gallon), going diesel makes economic sense. The fuel costs between 10 cents and 30 cents less than gas in most parts of the country (although it's higher in some places, too). It provides much better mileage than gas and burns cleaner (see BW, 5/31/04, "Diesel Deserves a Second Chance"). For those feeling especially adventurous, biodiesel fuel -- a mixture of diesel and corn oil, which makes the fuel even cleaner and cheaper -- is now available at close to 200 outlets in the U.S.

Splurge on a high-end washer-dryer. Energy-efficient appliances offer lots of savings on your electricity bill. You may even be able to get a rebate from the government's Energy Star program for trading up (go to www.energystar.gov to look for local deals). Best of all, some of the trendy, expensive models are the most energy (and water) efficient. So go ahead, ante up for a $1,000 Bosch front-loading washer and feel good about it, knowing you could be cutting up to $110 a year from water and energy bills. Savings like that pay for the machine.

Solar power your hot-water heater. For solar-power aficionados, hot-water heating systems are entry level. But you can knock 10% a year off your bill with an initial $7,000 investment in a solar unit to heat water. Brandon Leavitt, president of Solar Service, in Niles, Ill., says his customers save about $1 a day on their energy bills. Better yet, some states like Illinois will give you a rebate of up to half the cost of the unit.

Leavitt says the systems pay for themselves in about 10 years (less, if energy prices rise) and end up with a 10% return on investment over their 30-year life. Check out the federally-funded National Renewable Energy Laboratory's Web site to learn more about solar power.

Light your home with energy-efficient bulbs. Looking for a smaller-ticket item? Tubular compact fluorescent (CF) bulbs aren't the epitome of chic, but they use one-third the power of regular bulbs and last up to seven years. The Energy Dept. estimates that the average family spends $160 a year to light their home, and using CF bulbs can cut that bill by 75%. Try IKEA for popular varieties for as little as $4, spend a few bucks more for round-looking bulbs, or spurge on $36 bulbs that mimic natural sunlight.

Do some creative landscaping. Farmers used to do simple planting to make their house warmer in the winter and cooler in the summer. They'd plant evergreens on the windy side (usually west) and deciduous trees on the sunny side (usually south). That would offer shade in the summer, but let the sun warm the house in the winter. Modern studies have proven that tree planting can save a quarter of a household's heating and cooling costs. One study showed that planting evergreens on just the west side reduces heating costs by 25%.

Meter your old appliances. For roughly $35 you can get a "Watts-Up" or "Kill a Watt." Make a game out of it, and you may even convince your spouse to stop using the energy-wasting remote control (The Energy Dept. estimates that Americans waste $3 billion a year powering home-electronics gear that's turned on but not in use.)

Sell your surplus power back to the electric utility. Already got solar or a hydroelectric generator? "Net metering" programs allow customers who produce more electricity than they need to sell the surplus power back to the utility (although usually at a lower rate than what you pay for power). "Your meter sort of runs backward," explains Ellen Morris, president of consulting firm Sustainable Energy Solutions in Glenridge, N.J. "You're actually giving back to the grid, and they credit you."

The programs vary by state. California offers good advice for everyone and benefits for state residents at www.fypower.com. You can check what your state offers at this Energy Dept. list..

For ways to generate your own power, check out Home Power Magazine. It's not just solar -- you can also buy a windmill or a hydroelectric generator designed for home use.

Put in a geothermal heat pump. This is more of a construction project -- best done when you're upgrading your entire heating and cooling system, or, better yet, building a new home. It works this way: A series of underground pipes essentially move heat out of your home to the cooler ground in the summer. And in the winter, they pull the warmer air from the ground into your home.

"Basically it makes it less work for the traditional heating and cooling system," says Morris. They're pricey, costing more about $7,500 for a typical house. Yet, they use 25% to 50% less energy than conventional heating and cooling systems, according to the Geothermal Heat Pump Consortium. The investment is recouped in 2 years to 10 years and the systems should last 20 years or more with little maintenance.

Do your own energy audit online. A neat Web tool can make this exercise a lot more fun. Check out Lawrence Berkeley National Laboratory's Home Energy Saver. It helps you estimate energy consumption and suggests savings opportunities like putting in storm windows, insulation, and caulking. Such projects may not have the cool factor of running your car on corn oil, but for most of us, they're the bread and butter of energy conservation.

BODY:

I was recently lured into a Verizon Wireless store by a Web ad for a fancy Audiovox cellphone "only $50 after a $100 rebate. I really only needed a junky $50 phone to replace one I'd put through the wash, but for the same price, why not get the Audiovox with color screen and Ghostbusters-themed ringer? The Web site said the rebate offer lastedthree months, and the only catch seemed to be that I had to send them my old phone.

I sat down the next day with the rebate forms, pleased with my own consumer diligence. I felt I'd skirted a major obstacle when I saw that the formhad to be returned within two weeks, not three months. Then I realized I'd made a rookie mistake: I'd thrown out the box with the UPC code. I called up the store and started to explain my predicament. The clerk cut me off: You threw out your box, didn't you? Apparently they'd seen my kind before.

I was out of luck "even though they knew for sure I had the phone, since it was on their service. That, however, wasn't the point of the rebate. They were trying to thin out the rebate pool; they succeeded.

Over the last five years, rebate volume has been skyrocketing. The actual volume is hard to pin down because it is only tracked by guesstimaters in the industry. One of those guesstimaters, Michael Leonard, vice president of marketing at Continental Promotions Group, says the volume of rebates is about $4 billion today. Back in 1999 it was reported at just $1 billion.

Rebates are surging not because of manufacturers but because of retailers. You only have to visit an electronics store or leaf through a Sunday newspaper insert to see how far rebate-mania has gone. In a recent Best Buy ad, about one-third of the merchandise came with rebates.

When a manufacturer offers a rebate, you needn't be too suspicious. The manufacturer wants to lower the price temporarily (to move an old product or combat a competitor's new low price), but doesn't have faith that the retailer will pass on the savings. But if it's a retail store that is offering the rebate, ask yourself a simple question: Why isn't it just on sale? The store doesn't have any good reason to offer a rebate, since it could just as easily have a sale "if it in fact wanted you to have the product at a lower price. It doesn't, and that's the point. When you see that a store is offering you a rebate, remember that back at HQ some executive is betting against you, rooting for you to slip up, calculating the odds that you will lose the receipt, go on vacation, write in a wrong number.

A store offering a rebate must pay a fulfillment center anywhere from 40 cents to $1.75 to process each claimed rebate. When you figure in that extra cost and hassle for the store "not to mention the shopper's inconvenience and irritation "how can rebates be worth it? Economically, they make sense only if stores can count on not actually giving the rebate to a large portion of consumers. They can get all the benefits of advertising a lower price without necessarily having to deliver on that price to everybody, explains David Aron, assistant professor of marketing at DePaul University.

Even with the most attractive rebates, 10 percent of consumers fail to get their act together to turn in the form. Often the failure rate tops 90 percent. Women are better at closing the rebate deal than men. The success rate goes up as the rebate gets more valuable.

Stores use secret actuarial calculations to figure out what kind of rebate they can offer. And, increasingly, they employ brutal tricks to prevent shoppers from cashing in. It's fair enough for retailers sit back and hope consumers trip themselves up. But stores are erecting ever-more-elaborate obstacles to screw consumers out of their discounts.

Many rebates, such as my Verizon one, lure people in with the claim that the rebate offer will last a leisurely several months. Only if they read the fine print do consumers realize that they have only days after the transaction to send the forms in. (For another recent rebate, the store delayed sending me the right forms for so long that I only had one day to get them postmarked in time.) Some rebates require you to cash the check almost the minute you get it.

Other stores offeringrebates don't manage to send the check at all, perhaps relying on the forgetfulness of the customer. If you do remember that the check hasn't come, and you contact the store, it will often respond that it has no record of your rebate application. You're thinking, Here comes that tip to be cautious and keep copies. Well, no, because often the rebater specifies it won't accept copies. (The super-aware who return their rebate forms by certified letter or Fed Ex are often out of luck, because many companies won't accept those deliveries.)

Many rebates demand multiple kinds of documentation (forms, receipts, UPCs) or require you to complete elaborate forms for each component (printer, monitor, desktop). Sometimes you have tocircle a date or price to get your cash back. Many rebaters refuse to give the discount to more than one person in the same household. Some insist on access to your credit record before they'll give you the discount.

Perhaps the most notorious consumer rebate was one offered by Microsoft last year for people upgrading to Visual Studio or Visual Basic. [Note: Slate is published by Microsoft.] To get the $300 rebate, customers had to send in part of the box "from the original program bought years before. One small rebate company ran a program for stores that required the consumer to send in forms by registered mail every six months for three years, an exercise they call a memory test. After complaints, they now only demand a form at the beginning and end of three years.

I have become so alert to these practices that I have become a paranoid rebate shopper. When I bought some software from Staples recently, I was so girded for battle with the rebating authorities that I filled out the rebate form even before I loaded the software on my computer.

All of this hoop-jumping fuss "the paperwork, the postmarking, the sales slips "is quite unnecessary, says Leonard. Fulfillment centers can now do it all online "whether or not the purchase was online, with a credit card, or with cash. They don't need the UPCs or the old phones or any such nonsense. The sales receipt could contain a unique code number that the consumer could enter into a Web site. Think of that the next time you are dissecting a box to get a lousy UPC code.

BODY:

Imagine a world where no one called during dinner to discuss your long-distance service. No more running to the phone to find dead air when you get there. No more messages on your answering machine inviting you to a suspicious "Disney" vacation.

For years consumers could only dream of such freedom from telemarketers. This year, however, it might actually happen.

Money for a national do-not-call list was approved Feb. 20 when President Bush signed a government-wide spending bill. Federal Trade Commission Chairman Timothy Muris says consumers can start signing up for the free service this summer and the registry should be working by September.

Over the last decade the telemarketing industry has grown from an annoying steady stream of sales pitches to what most people find an unbearable, unstoppable torrent.

The Direct Marketing Association, the trade group of telemarketers, which had been hoping to stave off regulation, started a do-not-call list service back in 1985. People who did not want to receive sales calls could sign up and reputable telemarketers would take them off their lists. But it did not push the list very hard.

Consumers have tried all kinds of amusing schemes and electronic tricks to fight telemarketers. The main strategy is to waste the telemarketers' time so that telemarketing becomes less financially attractive.

Some consumers even pay for a $40 "telezapper" that promises to eliminate your number from telemarketers' computers. There is some science to these devices. Telemarketers use a computer to mass-dial. The tones that the phone zapper emits are not secret and mysterious. They are the same tones you hear when you call a disconnected number. In other words, the tones will tell the telemarketing computer you've moved. You don't have to buy a phone zapper, you can just download the tones at junkbusters.com and put them on your answering machine.

Consumer rage over telemarketers swelled over the last decade, but the federal government, persuaded by lobbyists from banks, credit card companies and phone companies, did nothing.

Finally, states started listening to consumers and cracked down themselves. The state do-not-call lists are no longer voluntary. Telemarketers must pay for the lists and use them. If they call people on the list, they get fined.

Last summer, Illinois finally jumped in to the game. By the time the service is scheduled to be up and running in July, 26 other states, inlcuding Wisconsin and Indiana, will have programs in place. The state programs have proved popular. According to a survey by the AARP, 40 percent of Missouri's residents have signed up.

Before money for the federal list was approved, the Illinois Commerce Commission began planning Illinois' program, known as the Restricted Call Registry.

"Right now, we're proceeding with the state mandate to set up the list, but we're also monitoring developments at the federal level," said Beth Bosch, spokeswoman for the commission.

Ideally, the databases eventually would be one and the same, but those logistics haven't been worked out, she said, noting that the emphasis is on simplifying the process for consumers.

"We still have the Illinois law requiring us to move forward with this program and that's what we're doing," she said.

For the Illinois list, consumers will pay $5 to join (which may go down in time) and telemarketers not only have to use the list, they have to pay $1,000 to get it. Right now the commerce commission is looking for a vendor to manage the list. Until they do, there is no way to sign up.

"We had many people who called immediately," as soon as the legislation passed, said Bosch. They continue to call, clamoring for the relief the list would provide. Consumers will start seeing advertisements this spring about how to sign up, and the commission hopes to have the program started by July 1.

The federal list will have the usual limits. It will not cover some of the most intrusive callers, those from businesses like phone companies that are regulated by the Federal Communications Commission and not the Federal Trade Commission. You'll also still hear from companies that claim to have "an existing relationship" with you.

At first, some legislators balked at the $16 million start-up pricetag. In December Reps. Billy Tauzin (R-La.) and John Dingell (D-Mich.) said they didn't see the need. Consumers, thinking these legislators ought to get a taste of what it's like to be in the sights of a telemarketer, bombarded their offices with telephone calls and they relented.

People can enroll in the do-not-call registry through the Internet or a toll-free number. They would need to renew their registration every five years. The program will eventually be funded by fees from telemarketers, but it's free for consumers to join.

Telemarketers would have to check the list every three months to determine who does not want to be called. Telemarketers who call listed people could be find up to $11,000 for each violation.

The FTC, which received 64,000 comments on the proposal, nearly all enthusiastic, expects up to 80 million people to join.

Telemarketers recently sued to block the list, arguing that it would violate their free speech rights. But judges so far have rejected telemarketers' attempts to equate their offers of cheap long distance with serious political discourse. So far appeals courts have backed the state laws. Case law has held that regulations on commercial speech are fine as long as they are narrowly drawn and serve a strong interest.

"The FTC is singling out this form of advertising now, what will be next?" DMA President Robert Weintzen said in a statement.

Fending off telemarketers

There's more than one way to get rid of telemarketers:

- Get on the current voluntary do-not-call list. The Direct Marketing Association runs lists to stop three annoying kinds of sales pitches: junk mail, spam and telemarketing calls. Go to their Web site, www.dmaconsumers.org, and sign up for all three lists. You can get the forms to mail in there.

If you're not online, you can also write them a postcard with your name, full address, phone number and signature. To get off telemarketing lists, write to: Direct Marketing Association, Telephone Preference Service, P.O. Box 1559, Carmel, N.Y. 10512. To get off mailing lists, write to: Direct Marketing Association, Mail Preference Service, P.O. Box 643, Carmel, N.Y. 10512.

- Join Illinois' Restricted Call Registry, which is expected to start up in July. Go to www.icc.state.il.us/rcr/home.aspx.

- Join the national list. The Federal Trade Commission will announce rolling eight-week phone enrollment periods for eight national regions. It's too early to sign up now, but keep posted at www.ftc.gov/donotcall.

- When telemarketers call, don't just hang up. Say the magic words: "Put me on your do-not-call list."

-- Carol Vinzant
YOUR MONEY.

BODY:

Two years ago, a 13-year-old Florida boy shot his sixth-grade teacher Barry Grunow to death on the last day of school. The story had all the makings of a great lawsuit: violence, tragedy, and social ills ranging from cheap guns to bad parenting. But the way this case and dozens of other like it is actually playing out in the courts involves something much more mundane: product liability insurance.

The Grunow case represents a new tactic for gun opponents, a strategy that involves scaring insurance companies away from cheap, dangerous guns. The Grunow case did not end up costing the gun businesses much; it was the insurance companies who got hit. And the insurance industry is too smart to pick up the tab for everyone else's mistakes. They are instead raising rates or refusing to take on or insure some gun businesses. Disreputable gun businesses pay dearly "by paying premiums four or even eight times as high as they paid a few years ago, if they can get insurance at all. Where they can't, they will likely be forced out of business, which is OK, too.

It's taken decades for suits against the gun industry to become this sophisticated and successful. When shooting victims first started suing, they went after the manufacturers. But even when they won, they got no money. Tom McDermott was one of the lawyers who worked on the first big successful case against the industry, Hamilton v. Accu-Tek. In Hamilton, the lawyers managed to prove a novel theory: that the industry tightly controlled all aspects of its product while turning a blind eye on who bought the guns. The jury sorted out, company by company, who had been reckless. Not surprisingly, it was the makers of Saturday Night Specials "poorly made guns selling for $35-$150, which frequently ended up in the hands of criminals "who were most culpable. This Brooklyn federal case (though it was eventually overturned) opened the floodgates for the next wave of gun litigation: negligent distribution claims "suits attacking the way guns are sold and the industry's habit of overselling to areas prone to crime or gun smuggling.

But when McDermott went to actually chase down the jury award related to Hamilton, he encountered what had become a rather typical evasive tactic of the gun industry. The company went bankrupt. So McDermott went after its insurance company. For just about any other product made in America, there would have been an insurance policy to clean up the mess left after a judgment and a bankruptcy. But the gun industry hasn't worked this way. Gun-makers have generally fallen into three categories: uninsured, badly insured, and legitimately insured. The high-end companies "the Colts and Smith & Wessons "are insured either through mainstream insurance carriers or through an industry insurance co-op "with such strict standards, it simply excluded all the makers of Saturday Night Specials.

The low-end companies for the most part simply went uninsured for decades, unable to afford legitimate insurance. But some found great deals on cheap insurance. And eventually they mostly were insured by the same company, ABC Co-op.

Faced with a slew of product liability and negligent distribution suits, ABC collapsed. ABC's MO for years had been the same as many of the gun companies it insured: When the claims built up, it would collapse and then restart as a new company. McDermott's dogged pursuit of ABC finally put an end to that. The FBI and a grand jury in Boston are now investigating the man behind the ABC Co-op, Howard Holladay, who claimed to be just a bureaucrat for ABC but who actually owned and controlled an international network of insurance entities. The insurance he sold turned out to be nearly worthless. Last year Kentucky federal Judge Joseph H. McKinley Jr. called Holladay's company a fiction of the imagination.

That's how McDermott realized that if he could force cheap gun-makers "who nearly all had either no insurance or Holladay's sleazy insurance "into getting legitimate insurance, he would effectively end their racket of dumping millions of unreliable handguns on the poor. Since these companies made riskier products, their rates would become much higher than the legitimate companies "if any insurer would touch them at all.

If nothing else, forcing gun manufacturers to buy legitimate insurance cut down on their juicy, sometimes 100-plus percent profit margins. The result of all these lawsuits "and one of the main goals of the Florida lawsuit "was to make the companies producing cheap, dangerous guns virtually uninsurable.

Grunow's case in Florida is a good example of what insurers now fear. The boy had taken the unlocked gun from a family friend. He went to jail, and the insurance company for the family friend paid the plaintiff $300,000. The insurance company for the pawn shop that sold the gun also paid $275,000. But the case was novel in that it targeted not just the gun owner or gun seller, but everyone along the supply chain. So last month a jury decided that the gun distributor "that's just the wholesaler, not the maker and not the retailer "should also pay Grunow's widow $1.2 million. But the gun-maker, Raven Arms, was already out of business. There was no insurance; Raven had claimed to be self-insured (a euphemism for uninsured unless you have a bank account the size ofPhilip Morris'). The gun distributor's biggest failing was in not checking the validity of Raven's insurance. That's a mistake that few in the gun distribution business will ever make again.

The big revolution in the gun-insurance market was not the direct result of any courtroom victory. Rather, it was that gun businesses started to look out for themselves. As the lawsuits started piling up, gun distributors started demanding that gun-makers submit a certificate of insurance to show that there was a policy to protect the distributor against lawsuits. Without the certificate of insurance, the gun-maker can't market its product.

As a result of these lawsuits, the distributors' demand for meaningful insurance has helped make the manufacture of junk guns financially untenable. McDermott, who has gone on a crusade of sorts ever since Colin Ferguson shot him and 24 others on a commuter train, is now writing up a class-action complaint to file in Judge McKinley's federal courtroom in Kentucky. He's suing on behalf of everybody ever hurt by any crappy gun that Holladay insured. The list will include perhaps hundreds of dead and maimed, including a Kentucky soldier killed when he bent down to tie his shoe and his gun fell and shot him in the stomach and a Philadelphia gun dealer whose hand was turned into a fleshy claw by an exploding gun. McDermott's list is, sadly, still growing; millions of cheap guns Holladay insured are still out there, even though the companies are long gone.

Holladay's insurance let those companies produce guns at historically low prices. It was his cheap insurance and the sloppy insurance policies of others in the trade that fueled a bonanza in handgun sales that peaked at just over 2 million a year in 1993.

The dozens of lawsuits by individuals and municipalities wending their way through the courts have already had their effect. The gun industry does its damage in dramatic, quick incidents. These lawyers do theirs in slow-motion assaults on the economics of the industry. Even without a dramatic courtroom victory "though one may still be coming "they have helped drive handgun sales to roughly half their early 1990s peak. It's certainly nothing flashy, but product liability insurance is turning out to be an effective weapon against the gun industry.

The author wishes to thank Dave Tinker, founder of Firearms Business.

BODY:

When average investors become aware of hedge funds, it's usually because of trouble, such as the near collapse in 1998 of Long Term Capital or the multimillion-dollar loss incurred last year by the Art Institute of Chicago.

But as the bear market grinds on, hedge funds have an improved image because they are either making money or at least not losing it nearly as fast as everyone else.

Thus far this year, the Hennessee Hedge Fund Index, which tracks a broad spectrum of hedge funds, was down only 4.8 percent, only about a fourth of the loss of the broad market as measured by the Standard & Poor's 500 index. Overall, 94 percent of the 3,000-some funds that New York-based Hennessee Hedge Fund Advisory Group tracks have beaten the S&P 500 this year.

When the rules for mutual funds were drawn up in 1940, regulators, still reeling from the financial chicanery of the 1929 crash, set up rules to protect investors.

They figured rich and sophisticated investors could take care of themselves and were allowed to invest in the then-fledgling hedge fund industry without government protection.

Only decades later did investors come to realize that the strategy known as hedging wasn't necessarily as risky as it was perceived, and today more middle-income investors are trying to elbow their way into what was once considered a club only for the rich.

Over the last decade, the hedge fund industry has grown exponentially. It now stands at about $500 billion to $600 billion, up from only $20 billion in 1990.

Despite the new interest, the public still knows little about how hedge funds operate, partly because of a Securities and Exchange Commission regulation that prohibits them from soliciting investors.

Hedging is the practice of limiting risk by both buying stocks long and selling them short.

Hennessee divides funds into 23 strategy categories, including short-selling, event driven and merger arbitrage.

"Anyone who is lumping hedge funds together, and addressing them as a collective group, does not understand hedge funds," said Joe Nicholas, author of "Investing in Hedge Funds" and chairman of the HFR Group of Companies, which analyzes hedge funds.

The funds that have done best this year are the funds that sell short. According to Hennessee, such funds are up about 18 percent this year.

Much of the resentment against the industry is bred by this technique, in which an investor borrows stock from a broker and sells it in the belief the stock will drop. When it does, he buys it back for a cheaper price and pockets the difference.

Main Street investors used to have the idea that shorting stock was "un-American," said Charles Gradante, the chief executive of Hennessee.

The hedge fund managers that became famous on Wall Street--Michael Steinhardt, George Soros, Julian Robertson--all got rich making big directional bets on which way the market would go, especially by betting it would go down.

"The manner in which they made money," said Gradante, "led people to believe that hedge funds were cowboys, wild and woolly."

But today those big directional bets make up only 5 percent of the industry, and though they might not be the Wild West anymore, hedge funds are still a long way from mutual funds.

Some big differences

The main differences in regulation between the two is that mutual funds can't leverage as much--that is, bet more than they have--can't sell short as much and can't let managers take a cut of performance instead of a flat percent of assets.

But the hedge fund camp takes exception to the notion that they are totally unregulated. Jeffrey Kuchta, chairman of Chicago-based Hedge Advisors Inc., points out that many hedge funds have to report their holdings to the SEC.

"First and foremost, hedge funds are not unregulated," he said. "You can't just go out there and run roughshod and do insider trading."

Hedge fund fees are much higher than those of mutual funds. A typical mutual fund might take 1.3 percent of assets. The hedge fund manager might take 1 percent, then 20 percent of profits. The people paying higher fees are not being bamboozled; the higher fees allow them access to the funds with the highest returns, and the ability to try exotic strategies.

Mutual fund companies, worried about losing both their talented managers and their investors, have been offering up vehicles that could be described as hedge fund lite: They stray into hedge fund strategies without giving up the regulated structure. About a dozen funds like this exist, such as the Merger Fund, the Arbitrage Fund, and Boston Partners Long-Short Equity.

These funds typically charge much larger set fees that, unlike with hedge funds, won't go down if the fund doesn't make money.

Last summer Charles Schwab rolled out Schwab's Hedged Equity Fund, which shorts 20 percent of its assets. The fund requires a $25,000 minimum investment, rich by most standards, but not those of the hedge fund industry where the typical minimum is $1 million.

So why would small investors be trying to break down the doors to hedge funds if the cost is higher?

In a word: returns. According to Van Hedge Fund Advisors, through September about half of hedge funds actually showed gains while the average mutual fund lost one-quarter of its value.

Nicholas argues that hedge funds don't pose any more of a problem for unsophisticated investors that other investment vehicles such as penny stocks.

He thinks full and clear disclosure, not prohibitions, should be the way to keep investors safe in hedge funds.

"Certainly, anyone who is allowed to buy stocks should be allowed to buy hedge funds," Nicholas says. "Are stocks appropriate for widows or orphans?"
YOUR MONEY.

BODY:

President George W. Bush inherited the lousy end of the business cycle. The stock market has been falling throughout his entire term, battered by war, a feeble economy, and corporate scandals. Yet this decay still hasn't shaken Americans' faith that Republicans are better for the economy and the market. Poll after poll shows that when Americans divide up the chores of running the country, they tend to think of the economy and stock market as Republican domain and delegate softer issues, like the environment, to Democrats.

But Democrats, it turns out, are much better for the stock market than Republicans. Slate ran the numbers and found that since 1900, Democratic presidents have produced a 12.3 percent annual on the S&P 500, but Republicans only an 8 percent return. In 2000, the Stock Trader's Almanac, which slices and dices Wall Street performance figures like baseball stats, came up with nearly the same numbers (13.4 percent versus 8.1 percent) by measuring Dow price appreciation. (Most of the 20th century's bear markets, incidentally, have been Republican bear markets: the Crash of '29, the early '70s oil shock, the '87 correction, and the current stall occurred under GOP presidents.)

According to almanac editor Jeffrey Hirsch, the presidential party figures are among the most significant he's found. If the stock market were random, we'd expect such a result only one-quarter of the time. I don't know why people are convinced Republicans are good for the stock market, Hirsch says.

Nor does having a Republican Congress help the market. A Democratic Senate showed returns of 10.5 percent (versus 9.4 percent for a GOP upper chamber), and a Democratic House returned 10.9 percent versus 8.1 percent for the Republicans.

When both houses of Congress opposed the president, the return was a stellar 12.9 percent. Libertarians may celebrate this as proof that the market likes gridlock and government inaction. But the market likes steamrollers nearly as much: The S&P performs almost as well "returning 11.8 percent "when the presidency and both houses are held by the same party. The only situation Mr. Market dislikes is what we have now: one house for each party. Those years have a -0.9 percent return.

Republicans are no doubt muttering that that's just the stock market, not the whole economy. But real GDP growth follows the same pattern. Since 1930 (the first year decent data is available), GDP growth was 5.4 percent for Democratic presidents and 1.6 percent for Republicans.

There may be all sorts of explanations for the bias of the economy and the markets toward Democrats. The worst years of the Great Depression occurred under Republican Herbert Hoover, and Democrats got credit for the entire recovery. Democrats had some awfully good streaks of peace and prosperity in the '30s, late '40s, and '90s. These could be chance, or it could be that Democrats more tightly regulate the markets, which gives investors confidence. Democrats are more likely to spread the wealth around through public spending on education or transportation, which may stimulate the economy more broadly. The foundation of recent GOP economic policy "tax cuts "may offer narrower benefits than Republicans claim. High defense spending, another GOP hallmark, may only boost one sector while hurting the whole economy in the form of bigger federal deficits and higher interest rates.

Whatever the reasons for it, this Democratic dividend should encourage the party's 2004 presidential contenders. They have a new slogan to run on: Democrats "the party of Wall Street.

Moneybox thanks economists Susan Woodward and Robert Hall, Ibbotson Associates, and the Stock Trader's Almanac.

BODY:

To economists, Chicago is not known for its hot dogs, the oratory of its politicians or its ill-fated North Side baseball team, but for how fervently scholars on the South Side embrace the notion that markets are rational and efficient.

The University of Chicago won more Nobel Prizes in economics in the 1990s than the Bulls did NBA championships. Milton Friedman, Merton Miller, Myron Scholes and Eugene Fama are just a few of the economists on the team, all with the stature of a Michael Jordan, or at least maybe a Scottie Pippen, in the finance world.

The "Chicago School" of economics is known as a math-heavy, conservative theory that holds that people can be predicted to act in their own self-interest.

However, in 1995 this bastion of conservative economics thought hired Richard Thaler, a prominent economist from the opposing camp: behavioral economists. The behaviorists think economics is more unpredictable because people don't always act the way they should. Procrastination, lack of self-control, overconfidence, bad decisions and sometimes even generosity all get in the way.

This made discussions at the school, already boisterous, even more fun.

"Most of the finance faculty are uncommitted to either camp, which means they can and do criticize both groups," Thaler said. "We like to say that we all receive the same hostile reaction to our ideas. Gene Fama gets beat up in workshops just like anyone else."

Fama himself thinks that's all just part of the intellectual tradition.

"Everybody argues at Chicago, with the goal of eventually being vindicated by data," he said.

Behavioral economics is in vogue now. Behavioral research tends to be much more accessible, even sexy, compared to traditional economics. Terry Odean of the University of California-Berkeley, for example, has shown that "trading is hazardous to your wealth," that is, the more investors trade, the worse they tend to do in the market. Odean went on to find a certain class of investor who is prone to this "overconfidence" in its ability to outsmart professionals: men.

As the market has fallen, the public has gravitated even more toward the behavioral way of thinking because it offers a more satisfying explanation of the bursting tech bubble.

To the efficient market camp, stock prices are rational because they reflect all the currently available information. So, they were as rational in 2000 as they are now, even though they are now 50 percent to 75 percent cheaper and investors have lost $7 billion.

"Bubbles are identified on hindsight," Fama said. "Tech prices, like all prices, are correct now, given currently available information."

Behaviorist think that prices were irrational, that people got greedy and started expecting the market to continue to crank out the double-digit returns of the bull market.

"As their gains accumulated, [investors] developed what I have called a 'house money' mentality," said Thaler, "thinking that the money they had made in the last few years offered a psychological cushion against future losses, much like gamblers who have won some money early in the night feel as if they are free to gamble."

The schools, however, are not always polar opposites. The theories try to explain different aspect of economics: The efficient market theory tries to explain how stocks are priced, while behavioral economists focus on how individuals behave (and misbehave) with their money.

Both take a dim view of individual investors who think that they can beat the market, and both offer some lessons that individual investors can learn and incorporate in their own finances.

The efficient market theory holds that you can't beat the market because whatever information or insight you have into a stock (aside from the illegal variety of hot tip that former ImClone Chief Executive Sam Waksal is accused of dispensing), that information is already built into the stock price. While some money managers may have a winning streak, very few, if any, can beat the market averages over a meaningful amount of time.

So, if you can't beat the market, the next best thing is to join it. Buy an index fund, which will buy all the stocks in a broad market index such as the Standard & Poor's 500 or the Wilshire 5000. As an added bonus, having a machine do the work cuts expenses by more than 1 percent a year.

The Vanguard 500 index is the most popular fund in the country because so many investors have caught on to the genius of indexing. Fama, himself an index investor, is pleased. The popularity of index funds has saved investors untold millions.

The behavioral school has more direct advice on how to watch yourself and keep yourself from making typical human mistakes.

Behaviorists note how poorly people save for their own retirement, which they would not do if correctly acting in their own self-interest. To fix the problem, Thaler got employees at a midsize company to agree to commit part of their future raises to savings. The vast majority of workers signed up and stuck with the plan, increasing the group's saving rate from 3.5 percent to 11.6 percent over 28 months..

Whether people can successfully commit to this kind of plan without an external mechanism is unclear. Thaler fears that the promise may fall the way of most New Year's resolutions.

Individual investors tend to let their emotions get in the way of their stock decisions, too. Thaler said people are so reluctant to admit they made a mistake that they hold onto their losing stocks, which often then slip further down.

Thaler co-manages two mutual funds, one of which tries to "identify mispriced securities that result from behavioral biases of key market participants." The Behavioral Growth Fund has offered an annual return of 3.7 percent since it started at the end of 1997.

One of the benefits of applied behavioral economics is that it can get investors to act rationally and in their own self-interest, the way that the Chicago School says they should have been acting anyway. Few are expecting that the market will be able to be tamed or trained.

As J.P. Morgan once said, "The market can remain irrational longer than you can remain solvent."
YOUR MONEY.

BODY:

If you can judge a society by how it treats its animals, New York is in sorry shape. The city's animal-welfare system, one of the worst in the country, is bound to get worse with this year's budget cuts.

The 16 percent cut at the Center for Animal Care and Control, more colloquially known as the city dog pound, may not seem draconian -- but the the agency is already drastically underfunded. The city will spend $7.2 million on the agency this year, less than $1 per New Yorker, while the Humane Society of the United States recommends spending $4 per resident for an effective animal control program.

We get what we pay for. In June, the city comptroller confirmed what animal rights activists have been saying for years: the shelter agency "accidentally and needlessly" euthanizes the animals it is charged to protect. Euthanasia is a necessary part of urban animal management, but New York City puts down far too many animals. Last year some 50,600 cats and dogs entered the control center, and 36,500 were put to sleep. We're killing 72 percent of the animals that end up in the city shelter, an average of 100 a day.

Money won't solve all the agency's problems. The comptroller found that animals were subjected to abuse and neglect, and employees who mistreated animals were rarely dismissed. The agency is also notoriously hostile to volunteers, even those willing to take in otherwise doomed dogs and cats.

But money would surely help: the budget cuts approved by the Bloomberg administration mean shelters can't stay open 24 hours.

In times when social service programs are getting cut, it's hard to argue that more general tax dollars should go to puppies and kittens. But the city's unwanted animals could easily be supported by animal lovers paying more for dog licenses. The city's license program has been so ineptly managed that only one in 15 dogs are actually registered and the fees are ludicrously inadequate. The basic license for a neutered dog is $8.50 and $11.50 for an unneutered dog. This is nothing compared with the $1,000 or so it takes each year to care for a dog.

Raising the basic license fee substantially is a sensible way to make up for part of the budget cut. The reason people don't register their dogs is not because the fee is high, but because the process is so arduous and there is no real enforcement. The key to better animal control is to make licensing easier, along with creating a better enforcement system that levies heavy fines on owners caught with unlicensed dogs.

Currently the people who have it the worst are responsible dog owners who neuter their pets. The health department requires owners to show their dogs are neutered with either medical records (which don't exist for many rescued animals) or, bizarrely, an affidavit stamped by a notary public, which was required until recently even for license renewals. One solution is to have veterinarians, who already dispense rabies shots and tags, do the same with licenses.

The city must also increase the surcharge for unneutered animals. The surcharge is now a lame $3, less than what it costs for a decent-sized rawhide bone. Not long ago, Los Angeles, for example, raised its license fee for unneutered dogs to a much more realistic $100. New York should do the same. Unneutered pets cause the overpopulation problem, and unneutered male dogs can be particularly aggressive in dog runs and on crowded city sidewalks.

Raising the license fee would not be a big burden for responsible dog owners, many of whom spend lots of time and money caring for the city's strays. Many dog owners take it upon themselves when they find a stray dog to get it to the vet and find it a home to save it from almost certain death at the city pound. Instead of having one functioning, humane animal shelter, New Yorkers have had to set up their own ad hoc animal shelters in storefronts, apartments and basements all over the city.

The city is spending millions of dollars on animal control, killing tens of thousands of animals a year. Sensible public policy would make it easier to license animals, impose heavy fines on owners who don't get licenses and require that those who refuse to neuter their dogs pay for that privilege.

BODY:

Martha Stewart's wasn't the only interesting call ImClone CEO Sam Waksal received on Dec. 27. On Dec. 26, Waksal had learned the FDA wouldn't approve his cancer drug Erbitux. He (and perhaps others) allegedly warned enough holders of ImClone stock that their exodus caused the price to fall, alarming other investors. The House committee investigating ImClone has procuredWaksal's Dec. 27 phone log.What's remarkable about the document is who did call, and who didn't.These days, Wall Street is thought to be a (relatively) level playing field for ordinary investors. Little guys are guarded by investor protection laws passed since the crash of 1929. More important, ordinary investors now have pros on their side, brokers and mutual-fund managers whose control of billions of dollars is supposed to give them insider access. This didn't help in the ImClone case.ImClone's biggest investor, aside from Bristol-Myers, was Fidelity, the Boston fund behemoth that represents 17 million investors. Fidelity held a whopping 15 percent of ImClone shares, worth as much as $750 million at their peak. According to mutual-fund researcher Morningstar, Fidelity kept most of its ImClone in eight funds, with the biggest stockpile "nearly 6 percent of ImClone "comprising 1.3 percent of Fidelity Growth Company, one of America's 20 biggest mutual funds. We may be pondering for years who got an ImClone tip, but Fidelity sure didn't. Fidelity has a reputation of throwing its weight around, but no one at the mutual-fund company called Waksal on Dec. 27,according to the phone log. Nor does any other mutual-fund manager appear in the log.Fidelity got killed by ImClone's collapse. As of Fidelity's May 31 SEC filing, it still held 9 percent of ImClone.Alpha Equity Research CEO David O'Leary, a leading Fidelity watcher, figures that Fidelity has lost about $600 millionby not getting out at the peak. (The stocktraded at $75.45in November, but closed Wednesday at $6.52. However, the filings don't make clear when orwhat Fidelity may have sold.) O'Leary says Fidelity was likely trusting the wisdom of Bristol-Myers, which didn't get cold feet till spring. If the ImClone hit were distributed equally around Fidelity (which, obviously, it wasn't), that $600 million would translate to a $34 loss for every Fidelity investor. So if you're wondering who was hurt by the possible insider trading at ImClone, look no further than your own 401(k) plan. Your fund manager wasn't chatting up Waksal, but hedge-fund managers were. At least three hedge funds appear on the Waksal call list: Ziff Brothers Investments, Merlin BioMed, and SAC Capital. While the typical mutual-fund investing household makes just $62,100 a year, hedge funds generally require at least $1 million to invest. Two of the hedge funds that called on Dec. 27, SAC and Merlin, were actively trading in ImClone, according to Dec. 31 filings with the SEC. Waksal's secretary took a message from Stuart Weisbrod, the chief investment officer of Merlin BioMed: re: shares? Weisbrod, who used to be a famed pharmaceutical analyst, did not return a request for comment. SEC filings show that on Dec. 31, Merlin BioMed held ImClone put option contracts (which are bearish) valued at $4.6 million, along with $1.8 million in ImClone stock. The call from SAC Capital was turned over to someone at ImClone named Andrea. A spokesman for SAC said that the call was forwarded to investor relations but not returned. There was no call. There was no conversation, the spokesman said. SAC are the initials of the fund's founder, legendary trader Steven A. Cohen, the most powerful person on Wall Street you've never heard of. SAC is well-known for leaning on trading desks for the latest information on companies. SEC records show that SAC also held both ImClone stock and options betting against it on Dec. 31, the first trading day after the FDA announcement. The current amended filing shows that SAC had a long position of $17.9 million and $1 million in options betting against ImClone. It's impossible to discern from this snapshot what SAC's strategy, profit, or loss was. In short, Waksal's phone log represents queries from the rich "most famously, of course, Martha Stewart, but also Carl Icahn "and from people who manage the money of the rich. (While some of the calls seem personal, others must now be making the people who made them cringe. Is it time yet? asked a 1 p.m. message from Robert Takeuchi, president of Softbank Finance, a Japanese venture firm. Softbank had invested $10 million in Waksal's Scientia investment fund.) And at least two of those calling directly to the CEO were major Wall Street investors who would soon play the stock. This is exactly the kind of behavior and special advantage that the SEC's recent Regulation Fair Disclosure, or Reg FD, was trying to prevent. The purpose of last year's rule was to ensure that all investors, large and small, should have equal access to material information about a public company at the same time. Frank Heflin, an assistant management professor at Purdue University who studies Reg FD, said the legality of the calls would hinge on what was said. Still, calling the CEO seems odd. I'm kind of struggling to think of an example of something [they could have talked about] related to the company that was not in violation of Reg FD, Heflin said. Why spend the time and the trouble to ask if you don't think you're going to get something out of it?Clearly those who called Waksal had confidence or, at a bare minimum, hope he would reveal something about the company. This is a sign of how unfair Wall Street still is: Ordinary investors, perversely, should be asking why their mutual funds didn't make the same sleazy calls.

BODY:

When you're accused of insider trading, etiquette demands that you present some alternative explanation of why you just happened to do exactly the right thing at exactly the wrong time. Saying you were lucky doesn't cut it. (The standard response these days is to claim that you heard the stock mentioned on CNBC. Ivan Boesky fended off the SEC for more than a decade by claiming he got his takeover ideas from reading the newspaper.)

Martha Stewart knows nothing if not etiquette, so when it came out that she had sold her nearly 4,000 shares of ImClone on Dec. 27, the day before the company announced the FDA would deny approval to its cancer drug, Stewart had a ready explanation: She claimed that she had arranged with her broker in November to sell the stock if it dipped below $60.

Stewart denies she had any secret stock-moving information on ImClone, and many of the facts uncovered so far jibe with her story. The stock did dip below $60 the day she sold. Phone records back up that her broker first called her; she returned the call and then, after the trade was executed, called her friend Samuel Waksal, ImClone's CEO.

Still, Merrill Lynch announced Friday it suspended her broker, Peter Bacanovic, who happens to be a former ImClone employee and who helped Waksal's daughter sell her ImClone stock the day before. One theory is that Bacanovic could just as easily have tipped off Stewart as Waksal.

And Stewart's account of how and why she sold at $60 is puzzling for some who trade stocks regularly. Normally an arrangement to sell at a set price has a formal name, a stop-loss order, and a highly formal procedure that results in a customer getting receipts in the mail. No paperwork for a stop-loss order has been produced so far. If that order had been in place, there would have been no need for Stewart and her broker to talk at all.

What she said was not understood by the broker as a formal stop-loss, says Jack Coffee, a securities law professor at Columbia. He seems to have treated this much more as a conversation, a reminder to call her at 60.

There is some confusion about stop-loss orders for Nasdaq stocks. Policies vary from firm to firm. Not every firm accepts stop-loss orders for a particular stock. But Merrill was a dealer in ImClone, so it could have handled such an order. According to the Wall Street Journal, Merrill's policy did not require Bacanovic to enter the order in Merrill's computer.

Other evidence suggests that Stewart didn't have a formal stop-loss order. The whole point of a stop-loss order is to sell a stock as it slides, not after. But the sale of her stock was delayed: She unloaded it at $58, not $60, costing her nearly $8,000. A client with an official stop-loss would be upset if her broker didn't sell when he was supposed to.

Then there's the matter of the $60 price target. A price target is not something a trader whips up informally out of scraps of dryer lint and taffeta. People who set price targets normally see stocks through the lens of technical analysis. Their main technique is drawing two lines on a stock chart to pen in the range where a stock tends to trade. If the stock breaks through the top resistance line, they think something good is up, so they buy. If it drops below support, they sell because it's going to drop further. Perhaps the freakiest thing about technical analysis is that it actually works.

Whether Stewart, a former broker herself, or Bacanovic used technical analysis is unknown, but it's something they would be familiar with. Would $60 have been a reasonable target to set for ImClone? It all depends on how far back in the stock chart you look and whether you are a short-term or long-term trader. (Stewart said in her statement that she bought the stock several years ago, probably for less than $20, since that was its range before 2000.)

Richard Dickson, a technical analyst at Hilliard, Lyons, thinks $60 would have been a legitimate target for someone who looked at the performance of the stock in the last month before Stewart's order. Checking the chart back 11 months to January, Dickson would have set the target just under $57. Former day trader Eve Seligson-Mor reads the charts differently. She thinks the real support was around $45 when Stewart gave her order. She would also have taken into consideration the 50-day and 200-day moving averages. By late November, the 50-day was around $60, but the longer-term 200-day average was in the high 40s.

What Dickson finds peculiar is the roundness of the $60 number. One of the old saws of Wall Street is that you never set a stop-loss order on a round number, Dickson says. The reasons are complex but basically involve trying to avoid getting swept up by meaningless trading activity on the exact dollar amount.

And the informal stop-loss order was a clumsy set up, Seligson-Mor says, considering how long Stewart was in the stock. If you've already made so much money and you want to get out, why are you fooling around? Seligson-Mor asks. A more logical course of action would have been for Stewart to simply sell the stock in November or, if she wanted to hang on but protect her gains, to buy a put option. For a small fee, Stewart could have bought a put option that would have given her the right, but not the obligation, to sell the stock at a set price.

All of that is not to say that Stewart didn't make some informal, prescient arrangement with Bacanovic in November. But the squishier the arrangement, the less effective the story is as an excuse. Sick of hearing of people who claimed that they were planning all along to sell the stock for, say, their kid's college tuition, the SEC came up with a new insider-trading rule in August 2000. If you knew inside information, the SEC is no longer going to get into a metaphysical discussion with you over whether it was part of your decision process. They just assume it was. The only exceptions are for people who set up irrevocable trading plans in advance, Coffee says, and Martha's doesn't come close.

No matter how messy all of this looks, it still doesn't amount to an insider-trading case. What that would take is someone coming forward to prove that Martha actually knew information from inside ImClone. If Bacanovic told her that it simply looked like a good time to trade but didn't say why, for example, she did nothing wrong. It may turn out that Stewart is as good at picking when to sell stocks as she is at everything else.

BODY:

If you haven't tried it yet, eBay, the mammoth online auction site, may seem like a new national sport that everyone except you has learned to play. The site has 42.4 million registered users who are collectively buying, selling and bidding on about 7 million items at any given moment.

Last year eBay, one of the few Internet successes, sold $5 billion worth of treasures and trash. EBay puts the power of the computer and the Internet behind the temptation of the garage sale.

However obscure your obsession, eBay will indulge it. Someone would have to spend years trolling garage sales to find the likes of, say, a postcard of the West Side stadium where the Cubs played before moving to Wrigley Field. On eBay that desire can be satisfied in seconds. Although collectibles seem to weigh heavily on the minds of eBay shoppers, brave and industrious shoppers can also find everything from new designer clothes to electronics.

When the online auction craze started in the mid-1990s, eBay was one of dozens of sites; now the field has narrowed. Specialty sites offer their own auctions and a few withered general competitors remain, such as Yahoo Auctions. To really find something rare, however, a dedicated shopper is going to have to learn the eBay system. So, how do you get set up?

The first step is simply to get yourself an account, which will require you to come up with a user name, a credit card and an email address. After you buy something, you will have to make arrangements to pay the seller yourself.

But be warned: There is a small risk--exactly how small eBay isn't saying--that you will end up feeling ripped off by your purchase. If so, there is not usually an easy mechanism to complain, let alone find a remedy. And the seller will be ill-equipped to handle a direct credit card payment.

So, Tip No. 1 is that your shopping life will be made infinitely easier if you hook your credit card up to an online person-to-person credit card payment service, so you can zap virtually anyone money. PayPal is the main one; Billpoint is eBay's version. The services take a tiny cut from the seller but cut down enormously on your paperwork and hassle.

If you're unacquainted with eBay, stroll around the site. Use the "Browse" features to look at all the categories of things out there. By going deeper and deeper into subcategories, for example, "Books, non-fiction, travel," you effectively walk down the aisle of a store. You will quickly find, however, that the aisles are about three miles long.

That leads us to Tip No. 2: Browsing is for suckers; search instead. Browse if you want to see all 26,000 Beanie Babies for sale, or if you want to subject yourself to the electronic version of a retail barker: eBay's "featured items." Sellers pay extra so they pop up at the top of the screen.

Tip No. 3: Regard anything tagged "featured item" as suspect. One recent example was a diet plan that promised a weight loss of 99 pounds.

To avoid a browsing odyssey, figure out what you're looking for and use "Search." Try to remember every obscure area of interest you have. Look for memorabilia from your hometown, goods emblazoned with your last name or rare plants for your garden.

Remember also that this is not a perfect system. Your search may turn up more or less items than you suspect. EBay's computers routinely miss items that should pop up in your search. If a search is turning up too few items, check your spelling. If you happen upon an item you like that has been misspelled, you may be at a bidding advantage because other bidders may not find it.

Sorting through the 'junk'

Whatever you are looking for you will soon find another category of junk colliding with your search terms. If you want Lego toys, you will brush up against a Japanese brand of pottery with the same name. Weed out these distracting items by specifically excluding them from your search. For example "lego -(japan, japanese, pottery)."

Tip No. 4: Check out the seller before you buy. EBay works on a feedback system. The little number next to the seller's name represents the number of pleased customers minus the number of annoyed customers. So, don't be so easily impressed by just a big number. Be sure to click through to see if the seller has a history of complaints.

Tip No. 5: The easiest way to get ripped off is through excessive shipping and handling charges. If the price isn't posted, be sure to ask. If the seller only offers an extravagant shipping method, ask for something cheaper before you bid.

Once you have determined that you do want to buy something, you get to the hardest part of eBay: figuring out what your bid should be and sticking to it. The high bid prices on eBay are deceptive. You may see a new digital camera with a current bid of $6, but if the auction is going for days more, that price is meaningless.

So Tip No. 6 is to figure out what is a fair price by comparison shopping for similar items. This doesn't necessarily mean you have to get out of your chair. You can just look in online stores. More importantly, check other eBay auctions going on. Then--and this is the most important step--search for the item with the "Completed auctions" category. This will show what price the item has actually fetched and what your competition is. Checking the actual sales price will give you the most realistic price range.

EBay pros, however, rarely bid in flat dollar amounts. That's because there's a flaw in the eBay system. You would assume that if you entered $16 and if someone later bid $16.12 and the bid increment (minimum amount separating bids) is $1, you would win because $16.12 would be thrown out. However, under eBay's system of volleying bids back and forth, you could lose.

And that takes us to Tip No. 7: Bid in random odd cents. There is no conclusive evidence this will pay off; the result still depends on whether you bid the most, but you can outbid someone by just a penny.

Tip No. 8: Stick with your price. This will take all your strength. Everyone who's played on eBay for a while has had this experience:You find an item you covet, you bid a high price, it looks as if the item is yours, then someone outbids you. Suddenly, you are outraged that someone would "steal" your item from you. You retaliate by bidding higher and higher. If you win, you are almost inevitably stricken with buyer's remorse. If, however, someone pounces on your item in the last seconds of an auction, you also feel cheated.

The only way to avoid both scenarios is to bid the highest price you would want to pay.

"But if you have joined even one Internet auction, you probably know [rational bidding] is a fairy tale," wrote Stanford Professor Robert E. Hall in his book "Digital Dealing."

Swim with the 'sharks'

Buyers flock to eBay so they can be sharks and outbid someone at the last second, Hall explains. "They watch the last minute of an auction, hitting the refresh button every few seconds, poised to hit the submit button for their own bids a few seconds before the auction closes," Hall said. EBay encourages this behavior by its timed endings; other auctions do not close the auction for a set time after the last bid.

If you can't beat them, you can join them. Tip No. 9 is to become a little sneak yourself. The only way around these little snipes that come in and steal your item away is to do it, too. The easiest way to do that is to "watch" an item by hitting the binoculars icon. It allows you to stalk your prey silently. Then, in the last 15 seconds of an auction, you bid and hope your computer doesn't jam up.
YOUR MONEY.

BODY:

When news rocked Enron stock on Nov. 28, investors got to see first-hand the benefits of all-electronic trading. The Enron trading post at the New York Stock Exchange was overwhelmed with people dumping the stock. The specialist, the trader who manages all the trading in a particular stock, was so swamped that he stopped trading.

Investors who had access only to the NYSE had to sit tight. Meanwhile, investors with access to electronic trading networks, such as Chicago's Archipelago, kept trading. Over the next half-hour, the price on the electronic networks fell from $2.60 to $1.10 a share before the NYSE started trading again--at $1.10.

An Enron crisis, to be sure, does not happen every day. But there are plenty of little snags and snarls that translate to lost investor cash. A host of upstart electronic trading networks hope to reconstruct the stock market, smooth out those rough spots and make trading cheaper in the process.

At the head of that campaign is Archipelago, which gained approval from the Securities and Exchange Commission last October to become the country's newest stock exchange. Unlike conventional exchanges, Archipelago has no grand, stone edifice and, more importantly, no trading floor. Archipelago occupies only a few floors at 100 S. Wacker Dr., an undistinguished gray office tower in the South Loop. Archipelago, which processes 2 million trades a day, is by some measures the busiest exchange in Chicago and the biggest of the country's upstart trading platforms known as electronic communication networks (ECNs). As a group, these ECNs are giving the old stock markets a run for their money. By the fourth quarter, they were involved in nearly half of Nasdaq trades and about 6 percent in stock markets that have a trading floor, such as the NYSE. The work is revolutionary, but the office has all the excitement of an insurance company.

"The reason there's a lot of yelling and screaming in [traditional] trading rooms is inconsistency," insists Archipelago President Michael Cormack. "We have a lot of computer space that's really quiet that just hums away running trades through, consistently and without a lot of yelling."

When all the dust settles from the changing market structure, co-founder and CEO Jerry Putnam, 43, aims for the company to be one of three major national markets. "And we've done it from here," Putnam says. "We don't have to be the Second City when it comes to stock exchanges."

Putnam came up with the idea for Archipelago in 1997 when he was running a day trading company, Terra Nova. A new trading rule, aimed at getting brokers to handle their customer orders more openly, allowed for the creation of ECNs.

As an ECN, Archipelago already acted like an exchange: It was how buyers and sellers met. But Putnam wanted exchange status so Archipelago could share in trading tape revenue. To become an exchange, Archipelago had to get SEC clearance to become its own regulator. It sped the process up by merging with the Pacific Stock Exchange, which was already a regulator.

Archipelago probably helped itself by merging with the REDIbook ECN. Since Archipelago specializes in back-end computer equipment and REDI is known for a friendly front end, Bear, Sterns trading analyst Amy Butte, thinks it's a good match.

Plus, the deal allows Archipelago to keep a presence as a broker-dealer, just in case this whole stock exchange thing doesn't work out, Butte said. "Because this space is still like the Wild, Wild West," Butte said, "it creates a great hedge for the users and owners of the system."

Archipelago's original liability was a small customer base. So Archipelago designed a sophisticated computer system to link up with traders everywhere. The strategy was risky: it's like sending your business to your competitor.

To understand better what Archipelago does, picture it as a stereo store. Instead of just selling you its own goods, the clerks look through all the ads, find the best price for the stereo you want and get it for you. The Archipelago computer keeps track of how reliable and quick the various brokers and stock exchanges are so that if there's a tie in price, it knows which to choose.

Soon the disadvantage became an advantage: Customers knew they could get the best price anywhere by coming to Archipelago, so that's what they did. According to Butte, Archipelago enjoys the reputation of always trying to find what's known in the trade as "best execution," a complex mix of speed and price.

Archipelago now makes up about 30 percent of the ECN market, according to Greg Smith, trading analyst at J.P. Morgan. It currently matches 60 percent of its orders with its own customers, up from only 5 percent when it launched.

Competitors take notice

To fight back, traditional markets have spruced up their electronic networks, so that traders will not need ECNs as much. That could spell trouble for ECNs, especially those like Archipelago that are more known for routing orders well to many destinations rather than being the destination traders want to reach, Smith wrote in his latest report. "Over time we expect routing to become more of a commodity," he said.

The biggest difference that individual investors are likely t