Harvey Houtkin is not happy with the big market makers of Wall Street.
But given these politically-correct times, please don't call this slightly paunchy revolutionary any of these horrid names: a bandit, a roach, a shark, or even an electronic highwayman. Names do hurt this author.
Houtkin, who has spent over a decade trying to pull an end-around on the powers that be in the brokerage world, is angry. And he says the average individual investor who has just sold a stock isn't in the mood for beer and Skittles either.
"I do not believe there is a person in this country who has interacted with the brokerage community in the execution of a trade who has not felt screwed," Houtkin writes.
And the author wasn't even talking about Smith Barney's famous "boom room." Or Prudential Securities' poisonous partnerships. Or Dean Witter's wretched rollups. Or the "loaded" with sales charges mutual funds of many of the wirehouses, many of which have embittered tens of millions of investors, who when they hear the word broker launch into a paroxysm of invective too brutal to put into these gentle pages, or any family publication.
SOES Bandit
No, Houtkin, the original Small Order Executive System, or SOES bandit ah, advocate is talking about something more basic than a few bad products that keep the lowly scribes gleefully writing about the dead and wounded of investing. He believes the basic problem of the trading business is the flawed relationship between the financial intermediary called a broker and the individual investor he or she supposedly wants to serve.
Actually it's the investor who gets served up on a platter, Houtkin contends. Will the broker put the interests of the firm or the investor first? For Houtkin, the preceding was a rhetorical question.
"Putting faith in your broker to do the right thing is like Little Red Ridding Hood trusting the wolf," Houtkin writes.
But Houtkin wants to do more than pump up a kind of trading firm that he runs and champions. He wants to invite more rivals for the big Wall Street firms that he detests.
This book is a primer for trading without brokers, for investors becoming opportunistic DAET (Direct Access Electronic Trading) traders who make their own profits without the direction of "full-service brokers," a revolutionary concept. It is also an invitation for those interested investors to become DAET traders so they can trump what Houtkin believes are the antiquated trading technologies of the big firms.
Houtkin depicts the big market makers as evil Luddities, who he contends have a stake in slowing down the Information Revolution.
Think of it: If Houtkin is right, then he may someday be regarded as the anarchist who humbled the big boys of Wall Street. If he is right, then the Merrill Lynchs of this world are reactionaries fighting a war that is already lost.
The Royalist Mother Merrill, for example, wants to discourage online investors from doing their own trading. The Merrills of this world cannot imagine a world without their tens of thousands of brokers holding hands with investors, who hang on their every pronouncement. Houtkin cannot imagine a world in which these brokers will be anything but superfluous.
Houtkin argues that those looking for a second career or an interesting avocation should try day trading. The chairman and chief executive of Montvale, N.J.-based All-Tech Investment Group, advocates those ready for DAET should "grind it out;" they should adopt a low tolerance, high-velocity trading style.
"These traders watch many actively-traded stocks, get in fast on seeing a trend developing, grab a quick eighth or quarter point, and say good-bye," he writes.
The NASD
Houtkin is also bitterly critical of the National Association of Securities Dealers, claiming it disgraced itself and did everything possible to squash his movement.
"Literally from the first day of its implementation of SOES in 1984, I had problems with the NASD over its use to the point where I felt compelled to stop using this apparently wonderful system," Houtkin writes.
It was only the Securities and Exchange Commission, under the leadership of Arthur Levitt, which finally reversed the SEC's policy of malignant neglect. It finally took a regulatory action against a self-regulatory body, the NASD, in August 1996.
"I will state it simply and up front," Levitt said. "We have found a widespread course of conduct among market makers to coordinate their quotes. Investors paid too much and received too little when they bought and sold their stock on Nasdaq. New traders were, as a matter of course, trained in this fashion. Over time, this practice became the expected standard."
The author also believes that most members of the media have ignored the attempts to crush SOES. He notes that when market makers settled a class-action lawsuit for $1 billion which he obviously thinks is not much given the market makers' considerable resources it was buried in a back page of the Wall Street Journal.
Houtkin's book clearly challenges the old saw that many government regulators have repeated for generations: The U.S has the freest, most open capital markets in the world.
Levitt, one of the few Wall Street powers who isn't ripped by Houtkin, warns that the issue is more than one of trying to crush a unique form of direct trading.
"Markets exist by the grace of investors. When those who direct them lose sight of that cardinal rule, and sacrifice investor interests on the altar of short-term gain, then far from helping their market, they hurt it," Levitt says. "History regularly attests to this truth: witness the New York Stock Exchange in the 1930s, the American Stock Exchange in the 1960s, and now Nasdaq in the 1990s."
