“May you live in interesting times.” This purported Chinese curse ? it’s English, actually ? could be on the mind of Chuck Lugay these days. The senior vice president of Citadel Execution Services and Knight Capital veteran is the new president of the Security Traders Association of New York. In his 2015 term, Lugay has to figure out the best way to represent an industry that has been buffeted by a best-seller accusing speed traders of gaming the system, and is threatened with greater oversight by regulators. Sure, the stock market is soaring, but at the same time, SEC Chairman Mary Jo White is calling for greater transparency and accountability. Traders spoke with Lugay about his take on the market, what new regulations might look like, and what keeps traders and brokers up at night.
Traders: This is your first term as president of STANY. Can you tell us what you hope to accomplish this year as president?
Chuck Lugay: The Security Traders Association of New York [STANY] is an organization created by trading professionals to focus on issues in securities trading ? for traders, by traders. My plan is to continue representing their interests in the New York area.
Traders: Do you have a mandate? Are you looking to grow membership?
Lugay: Growing is always a priority and is for all STA affiliates. Currently we have 500 registered members, and we are looking to increase by 10 to 15 percent by year-end.
Traders: What are the top three issues for STANY and its members in 2015?
Lugay: We foresee a lot of discussion about regulatory and market structure issues. There are many interests and market participants who have strong views. While being open to different perspectives is important, it gets complicated quickly. We need to work closely together to put the best ideas forward.
The next issue is the continued electronification of asset classes, following in the footsteps of equities ? how our members will adjust to that. We are already seeing fixed income moving to more automated interfaces. In time, I would expect most other asset classes if they aren’t already electronic to follow suit. And finally, head count ? employment for traders is always a concern.
Traders: What is the biggest challenge for the financial services industry?
Lugay: The financial industry has a perception challenge. The role we play in deploying capital, keeping markets liquid, helping retail and institutional investors access our markets – it has been misconstrued and tarnished since 2008. It is important for us to show our value and make our markets even more efficient. This must be a collective effort across the industry. Main Street benefits from tighter spreads, increased liquidity, lower fees and faster, more reliable confirmations. Those are the facts, and that is what we provide every day. Competition on price, liquidity – these things benefit investors. Competition is a powerful force for Main Street.
New Regulation
Traders: It felt as if 2014 was a year of waiting for the other shoe to drop in terms of new regulation. In February, Mary Jo White said that in 2015 she will be focused on three things: market structure, increasing regulation and accountability for asset managers, and improving opportunities for smaller issuers. No real surprises here, though the most concrete change we see coming is in the widening ticks for small stocks. Any comment on the idea of creating new markets for those smaller stocks?
Lugay: The tick pilot looks to address the aftermarket for lesser capitalized, newly public companies – specifically by establishing different minimum price variations. The hypothesis is that if you widen the price variations, it becomes more attractive to make markets in these names, spurring increased activity. Will the wider spreads spur more interest in these smaller names? Good theory; we will have to wait and see.
Traders: And increasing accountability for asset managers?
Lugay: The regulatory environment is always top of mind from STANY’s point of view. We advocate for reasoned regulation that solves a problem and that makes our markets more efficient. But at the same time we oppose regulation for regulation’s sake – and yes, there can be some of that. We work closely with our regulators and appreciate the role they play. We are grateful to have the opportunity to have a seat at the table, to give our perspective, and to hopefully provide a view they might not have considered or didn’t know the full impact of beforehand.
Mood on the Floor
Traders: What concerns are you hearing from STANY members? What keeps them up at night?
Lugay: We have witnessed a transformation of our industry thanks to automation. It’s improved our markets tremendously. But this new environment requires new skills, and it’s not the Wall Street it used to be. It’s not who you know, it’s what you can do. I’ve seen a number of people make this transition successfully, but it’s not for everyone.
Traders: Are members feeling optimistic, confident?
Lugay: The confident professionals are the ones who recognized the need to adapt and have reinvented themselves to thrive in this environment.
Traders: Do they think that some of the troubles and criticisms were brought upon themselves in some part?
Lugay: I think that our membership has come through a difficult period, and we are stronger for it. We are more committed than ever to what we do, and how we do it. At the end of the day, our job is to deliver for clients. If we continue to do that well, we will all be better off.
Traders: What’s the mood from the men and women on the trading floor?
Lugay: The economy is improving, and financial firms are more engaged than ever. The regulatory environment continues to evolve, so we all watch that very closely.
Market Structure
Traders: Let’s talk market structure. We’ve seen the buyside-versus-the-sellside relationship change in the past few years. The buyside is demanding a lot more; the sellside is either shrinking or moving resources away from the buyside. How do you think that’ll look in 2015?
Lugay: That relationship will continue to evolve. There is a compression of commission dollars. The buyside is sophisticated, and they expect more services for the dollars they pay. One example is that trade cost analysis has become a standard offering. The sellside is being held to a higher standard. Ultimately both groups have to rely on one another, and work together.
Traders: Did the sellside allow that relationship to slip, or did execution, services and trading technology become a commodity?
Lugay: It’s a natural evolution in terms of competition and technology as well as other factors. The buyside’s needs and expectations have increased, and many aspects of trading and technology have been commoditized. Those are powerful forces, and they are shaping other industries as well.
Traders: There was so much buzz this year from Michael Lewis’s book Flash Boys. Do you see new regulation on dark pools, high-frequency trading and algorithmic trading finally emerging in 2015?
Lugay: Michael Lewis wrote a story – plain and simple. A recent Barron’s article looked at today’s retail market and concluded that retail investors have never had it better. Today, retail investors can trade for less, they get better prices than what is publicly quoted, and there is more liquidity. Regulators and market participants, including Citadel Securities, continue to work together to improve our markets and make sure they are fair, accessible and transparent.
In terms of algorithmic and automatic trading, when it comes to tech, proof is in statistics. What’s the saying, “In God we trust, everyone else needs to bring the data”?
There’s an abundance of data out there that demonstrates that today’s markets are more efficient than they have ever been before. In any industry, there are going to be so-called black swan events. We have very good oversight. But when technology moves so fast, that is part of the growth. You learn from it and you move on.
Traders: Will we see a consolidation of dark pools and exchanges? Do we have too many trading venues in the U.S.?
Lugay: It is impossible to predict where consolidation may occur in either financial services or dark pools. From STANY’s perspective, competition is a good thing. If the market can support it, [the market] will thrive. If not, it will contract.
Traders: Are we going to see a speed limit for HFT from Congress or regulators?
Lugay: They have taken a measured and data-driven approach. If they continue to do that, I don’t expect we will see significant change in this area.
Employment
Traders: Your predecessor, Patrick Armstrong, said that hiring new talent was difficult. Is it hard to lure Millennials and 20-somethings to work on Wall Street when Google, Facebook and Snapchat are the cooler jobs?
Lugay: We attract talent because we give the best and brightest the opportunity to succeed. People come to Citadel because they want to have an impact on the world of finance, they want to compete and engage. We give them that opportunity from day one.
Traders: In the last few years, we’ve seen report after report that firms are laying off or cutting thousands of jobs. The New York Times recently said that the recovery was not being led by the finance jobs that typically anchor the New York economy. Will this race to shed positions level off or slow down?
Lugay: The head-count issue is a big concern for our members, especially over the last six to seven years. When any asset class turns to automation or electronic trading, you’re going to see some attrition. That said, this has offered more opportunities for investors. We have to change and adapt.
Traders: When will Wall Street start hiring again?
Lugay: It isn’t a question of an increase in hiring. If you are talented and can bring value, there will always be room for you.
Traders: A recent news story in Traders reported that trading floors are shrinking. They were once jam-packed, but back-office support and IT people are sitting on the trading floor these days. How does one get a start in the business now?
Lugay: Even as the trading floors have evolved and the businesses have evolved, the way you get a job has not changed much. You have to get an internship and prove yourself. You have to be more driven than the person next to you. And if you have a unique skill set, that is indispensable. At the end of the day, it’s about results.
Traders: What are trading floors going to look like in five years ? will there be a trading floor?
Lugay: We probably couldn’t have told you what today’s trading floors would look like five years ago. The markets adapt and there will always be a need for talent, for technologists and for leadership. So no, I don’t think it will be just a wall of servers.
Past Experience
Traders: Before joining Citadel in 2013, you worked for Knight Capital for nearly five years. What did you learn after that day when your algo went rogue in August 2012? Did you know that it would cause the end of your firm as you knew it?
Lugay: That was a tough day. Looking back, I’ve had the opportunity to work on great projects throughout my career. It all led me to this point, and I’ve had a chance to learn from things that went well, and those that didn’t go well. You bring a spectrum of experience to a new job – I’m very grateful for that, and excited about where I am today.
Traders: What are your responsibilities at Citadel Execution Services?
Lugay: Citadel Execution Services is an industry leader, executing approximately 30 percent of U.S. retail equities volume. We make markets in 7,000 U.S.-listed securities and 18,000 OTC securities worldwide. I work very closely with our client base, and love the opportunity to interact with them and the markets. Our goal is to deliver for them.
Traders: What’s the best thing about your job?
Lugay: I get the opportunity to work with some of the smartest people in the markets and the most dynamic and innovative clients in the industry. It keeps me coming back every day. It is a demanding and exciting environment that drives me to succeed.
Traders: How has the industry changed since you started at financial specialist Morgan Stanley Dean Witter?
Lugay: Without a doubt, technology has shaped the business in such a way that no one could have predicted. It is a much more competitive landscape that has definitely benefited the individual investor.
