Paul Hennessey, a retiring veteran buyside trader and executive, has seen it all and survived it all in the last forty years. And lots of things have changed in that period.
He has seen money management go from a business exclusively for the well-heeled to one that serves a mass constituency; one in which the average investor can wield institutional influence through the power of defined contribution plans and other giant retirement plans with billions of dollars in assets.
He has seen fixed commissions become history; brokerage rates and trading costs decline dramatically. But most of all, he has witnessed the beginning of a technological revolution in the trading business.
The former Eaton Vance trader, who four years ago helped found his own-Boston-based firm, will retire by the end of the year. He will spend more time with his children and grandchildren in his Beverly, Mass. home. But although Hennessey says that his pace may slow down a little, the pace of technological change in the trading business will not.
The next two years will be critical for electronic communications networks (ECNs), says the veteran trader and executive. How will they handle the expected 2000 crisis at the same time that decimals are coming to the industry? What happens if expected computer foul-ups – the putative Y2K nightmare that the big media continues to prattle about – cause a bear market next year? Will the regulators or officials of the traditional market exchanges squash ECNs?
"I think ECNs are probably here to stay, but there are going to be some big changes because there will be some big challenges," says Hennessey, a principal of Boston Partners Asset Management, a trading firm with some $14 billion under management and four traders.
Although Hennessey is retiring, he still is very interested in what will be happening in the trading world.
First, ECNs will survive any Y2K problems, but there will be fewer of them. "I think we will get down from nine to five or four next year, then two or three over the next three years. There's not enough business for everyone. And only the strongest are going to survive, which means those that offer the best prices to money managers," he warns.
Hennessey's Darwinian reasoning is that there is not enough business to go around and that the big boys – the 800-pound gorillas such as Merrill Lynch, Goldman Sachs – are buying pieces of ECNs. Will ECNs even be around in the next few years? Or in what form? Hennessey says the big boys are preparing for all possibilities.
Second, Hennessey says ECNs have yet to be tested by bad times. Only some rocky periods for ECNs, he says, can provide critical information about their future.
"It is in bad times we are going to find out if ECNs are just a function of bull markets. Will there be enough volume to survive a bear market? Are investors really going to want to trade after the market closes when the market has been going down?" he asks.
Third, ECNs will face challenges from regulators and competitors, he predicts. Rival marketplaces will either try to liquidate them or incorporate ECNs, he adds.
Fourth, despite all the fuss and feathers about ECNs, their impact has yet to be fully felt in the business. ECNs have yet to make trading costs cheaper, he says.
"I don't think ECNs have caused any significant lowering of institutional rates because there has yet to be significant penetration. However, the potential is there in the future," he adds. That potential, he says, will trigger as profound a change in the industry as the one that came out of May Day in 1975, which ended fixed commissions.
ECNs will continue to dramatically change the industry, although the extent of the change is still to be determined, Hennessey says. However, the more things change, the more they stay the same, he notes. Regardless of technology, the qualities that make a good trader haven't changed in the last four decades.
"Good traders must have a competitive personality. They must be able to assimilate a lot of factors and make quick, accurate decisions," according to Hennessey. "A good trader must also have the ability to understand the other guy; to understand the client and what the client wants."
Those traders with these considerable talents, Hennessey says, will also survive no matter how radically technology changes their business.
