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FLASHBACK FRIDAY: Specialist Breaks Ground
Traders Magazine Online News, August 11, 2017
Back at the turn of the century, specialist firms and the brokers were faced with new challenges – and not just the Millennium Bug type.
One of those firms facing the 21st century market structure was LaBranche & Co., a New York Stock Exchange specialist firm. It was archetypical Wall Street brokerage. LaBranche had its roots planted almost as deep as the Buttonwood tree the NYSE was founded under and had survived the Great Depression, World War II and Black Tuesday. But back in August 1999, questions surrounded whether or not the venerable, 75-year-old Big Board specialist firm would be able to ride the wave of the electronic trading revolution.
"For anyone not completely mired in the drudgery of Y2K, 1999 was a time when Order Handling Rules and the rapidly emerging trading technologies were changing not just the face -- but the very economics -- of the US Equities market,” from Instinet’s John Comerford explained. “It was a time of evolve or die around Wall Street."
And while LaBranche wasn’t the only firm facing these new challenges, it was considered one that should fare well. Yet, the challenges facing many specialist firms and others were very real and survival was not guaranteed. But some have survived, albeit in different names and forms.
“Specialists (under their new name, DMMs) continue to be the fuel that powers the NYSE engine, and market makers do the same for Nasdaq and other trading venues,” explained Bill Harts of Modern Markets Initiative. “These liquidity providers are largely responsible for use technology to create the best markets ever for investors. The sad demise of LaBranche as a NYSE Specialist was really about the model for market making changing from human- to computer-driven, and the necessity of a firm to have the right DNA to accommodate that change.”
LaBranche was the last of the old-line, independent, family-name-on-the-door specialists, having been founded 87 years before by CEO Michael LaBranche’s grandfather, Harts remembered.
“I can imagine the gut-wrenching decisions that Michael had to make when confronted with the reality that many of the people he’d known and worked with his entire life—some of whom were the descendants of people who worked for his father and grandfather--just didn’t have the right technological skill set to make the business thrive.”
Eventually LaBranche & Co. succumbed to market pressures. It signed a definitive agreement to sell its NYSE Designated Market Maker business to Barclays Capital for $25 million in January 2010. Then finally, on June 29, 2011, Cowen Group completed its acquisition of LaBranche, ending the firm's independent existence in a stock-for-stock merger transaction valued at approximately $192.8 million.
This article originally appeared in the August 1999 edition
LaBranche & Co., a New York Stock Exchange specialist firm (NYSE:LAB), survived the Great Depression, World War II and Black Tuesday. But will the venerable, 75-year-old Big Board specialist firm ride the wave of a trading revolution?
Specialists firms are not immune to the same economic forces sweeping the Big Board and Nasdaq.
With electronic communications networks competing with them for order flow, the two largest U.S. stock exchanges are hungry to raise capital to strengthen their infrastructure and global outreach.
First Specialist IPO
LaBranche, one of the three largest Big Board specialists, is the first to forge ahead with an IPO, having priced at $14 a share, via a joint Salomon Smith Barney and Donaldson, Lufkin & Jenrette led offering. On Aug. 19, the first day it was traded, the stock's closing price was $14 1/2.
"This is sort of a microcosm of what is going to happen to the securities markets," said Randall Roth, an analyst at Renaissance Capital, a Greenwich, Conn.-based research firm that follows IPOs. "There will be some changes, but the real question is to what extent and how much will really change."
To find the answer, first consider what a Big Board specialist does. Specialists are brokers' brokers, standing ready to make a fair and orderly market in the stocks they cover. That means they are required to commit their own capital when there are no buyers and no sellers for a stock trade. Often the specialist acts something like an air-traffic controller, booking and recording a trade for the floor crowd and pocketing a commission.
Unlike market makers on Nasdaq, which operates an electronic network of competiting dealers in the same stocks, specialists have exclusive agreements with companies listed at the auction-based Big Board. When large blocks of stocks are traded, or when volatile prices threaten the market's stability, specialists regulate the flow and often use their capital to take positions that are contra to the market.
With Big Board volume hovering around 700 million shares per day, LaBranche's roughly 14 percent of that volume represents trading in the listed stocks of 280 companies, including AT&T and Chevron. Like the Big Board and Nasdaq, LaBranche needs an infusion of capital to grow.
"Trades are getting bigger and the firm needs more capital," Roth said. "It's a combination of maintaining a tradition and broadening its franchise."
The Proceeds
LaBranche raised $147 million from the sale of 10.50 million shares, or roughly 23 percent of its stock. The firm says it will use the proceeds to buy out Dutch market maker Van der Moolen, which owns about 14 percent of LaBranche.
The only comparable offering to LaBranche's is that of Nasdaq market maker and third market deaker, Knight/Trimark Group (Nasdaq: NITE), which went public in July 1998.
"Everybody is looking for another Knight/Trimark [IPO]," one analyst said. "LaBranche's IPO gives us an opportunity to see the insides of a specialist."
Capital aside, survival and continuing growth will depend on how successful the Big Board is at retaining the specialist system.
So far, the Big Board is committed to keeping the specialist model since it is regarded as providing the best execution of stock trades.
"Now the NYSE is committed to keeping its specialists," a LaBranche spokeswoman said. "When a company is considering changing from Nasdaq to the NYSE, one of the selling points is the specialist system."
That will work in favor of LaBranche as a publicly-traded company.
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