Thursday, June 5, 2025

Analysts Must Come Clean

The National Association of Securities Dealers, responding to criticism that Wall Street analysts aren't disclosing all conflicts of interest, is working on a new rule that would force analysts to give more information on their private holdings and their firms' relationships with market makers.

Officially, an NASD spokeswoman would only say that, "we cannot comment on any of that at this time." However, an NASD governor, Richard Romano, was quoted in a published report as saying that, "There has been some formal discussion on it." Romano, the president of the investment firm, Romano Brothers & Co., in Evanston, Ill., added that there has been no decision on a rule change.

Negative Comments

The last year and a half have been a bad time for many analysts. Few actually made any negative comments about the tech stocks that have tanked since the spring of 2000. But complaints have flooded Wall Street that analysts are pitching stocks that they owned or in which their employers held a stake or in which their firms are making a market.

That's why the NASD's Regulatory Division proposed a tougher analyst rule earlier this year. As originally proposed last summer, the NASD rule would require firms to disclose if they own more than a five-percent stake of a company's stock that they're trying to sell. The rule would also mandate the disclosure of the ownership of any position, including a short position, by an analyst employed by the firm. And it would require that an investor be told if a financial company made any compensation to a selling firm within the last 12 months. Market making relationships would have to be clarified.

Under the current regulations, firms must today disclose if they acted as a market maker or an underwriter in the last three years and if the brokerage firm or its officers own options, rights or warrants in the company that is being analyzed. For many critics of the trading industry, those standards aren't good enough.

Merrill Lynch and Credit Suisse First Boston are among the big firms that have recently imposed new, tougher disclosure restrictions on the holdings of their analysts. However, finding new standards that are acceptable to most parties is difficult. "It's a tough issue, there's no easy resolution, but they're working on it," Eugene Isenberg, an NASD governor, said in a published report. Any proposed rule changes approved by the NASD must be reviewed by the Securities and Exchange Commission.

Next Day Unsettled

The three-day securities processing standard could be safe for another year.

Next day transaction processing – the so-called T+1 – could be delayed by one year. It should now become effective in June 2005, the Board of Directors of the Securities Industry Association has recommended to the Securities and Exchange Commission.

"The industry remains committed to straight-through processing leading to T+1," according to Donald Kittell, executive vice president of the SIA. However, he conceded that this "less aggressive pace" is needed so firms can "complete critical technology projects." He added that the events of Sept. 11 emphasize the need for more extensive straight-through-processing as well as the reduction of manual processing of trading information and the physical movement of check payments and securities.

Industry Testing

The new schedule would mean that those securities firms that expect to be ready for T+1 must be ready by the middle of 2004. They would be required to participate in a full year of testing so they could certify that they would have the technological infrastructure to meet the new standard in 2005.

Securities transactions now clear and settle in three business days after the transaction. The new T+1 standard – when it becomes effective – would mean trades would clear and settle on the next business day.

Reserve Size Requirement Reduced

Beginning this month, Nasdaq has ended the requirement that market makers display at least 1,000 shares for their quotes using the market's reserve size feature. Under a rule change, market participants will now only be required to display 100 shares when using the feature.

The change was designed, in part, to make the competition between market makers and ECNs fairer. ECNs are only required to display 100 shares. Many traders have been pushing for the change.

One trader describes the 1,000 share size requirement as "ridiculous" especially since ECNs are only required to display 100 shares. But the flip side of the change, according to critics, is the reduction of transparency.

With 1,000 shares traders could tell if a participant was a serious player, said another trader. The problem is a rule change designed to help one constituency – individual investors – often comes at the expense of another, market makers. The issue is transparency versus the need of market makers not to tip their hands when they are trying to execute a trade.

The reserve requirement is used so market makers can line up a large block of shares for trading without letting competitors or day traders know what they're about to do.

Fast Track

*The Nasdaq Stock Market named David P. Warren chief financial officer. He was previously acting chief financial officer since July and was formerly chief financial officer at the Long Island Power Authority.

*William Johnston (inset), president and chief operating officer of the New York Stock Exchange, is stepping down in January. He will be succeeded by Catherine Kinney (inset), and Robert Britz, who are both NYSE executive vice presidents. They will share the titles of president, chief operating officer and executive vice chairman.

*Sandler O'Neil & Partners in New York named Jimmy Dunne (inset), senior managing partner. He was previously a managing partner at the firm. Jon Doyle was named managing principal and Fred Price was named chief operating officer. Doyle will continue to head the firm's fixed income sales and trading operation. Price was previously co-director of equity research at Sandler. The firm formed a new advisory board, comprising Andy Armstrong, Spire Capital; Stan Druckenmiller, Duquesne Capital Management; and Ken Langone, Invemed Associates LLC.

*Robert Gasser joined NYFIX Millennium in Stamford, Conn., as chief executive officer. He was previously head of U.S. equity trading at J.P. Morgan.

*SS&C Technologies in Windsor, Conn., promoted Normand A. Boulanger to executive vice president and chief operating officer. He was previously senior vice president, institutional sales. Gregory F. Reid was named senior vice president, services and Britain T. Price was promoted to senior vice president, sales in North America. Reid was previously a national consulting partner at KPMG Peat Marwick and Price was formerly vice president, institutional sales at SS&C.

*John Seeberg joined Greenwich, Conn.-based Interactive Brokers' institutional sales team. He was previously with Bear Stearns.

*Keefe, Bruyette & Woods in New York named the firm's chief executive, John Duffy (inset), to the additional post of chairman, a post that was formerly held by the late Joseph Berry. Andrew Senchak, previously vice-chairman and director of corporate finance, was promoted to president. Thomas Michaud, previously executive vice president and director of equity sales, was promoted to vice-chairman and chief operating officer. Duffy, Senchak, and Michaud will comprise the firm's newly created office of the chairman.

*Tamesis, a London-based supplier of real-time risk management and trading solutions to investment banks, appointed Leonie Alsop head of global marketing. She was previously director of group marketing at Financial Objects.

*HSBC Holdings Plc in London named Penny Haddon as a director in the firm's equity syndication team. She was previously an executive director at Goldman Sachs on its equity syndication desk.

*Ken Wortz joined Syntegra, the New York-based trading system provider, as vice president, operations. Wortz, who is based in the firm's Long Island customer service center, was previously with Metro Media Fiber Network.

*Gregor Bailor joined Capital One Financial Corp. in Falls Church, Va., as chief information officer. He was previously chief information officer at the Nasdaq Stock Market.

*Daniel Marciano joined Gerard Klauer Mattison in New York as director of institutional trading. He was previously with First Albany. Dawn Boyle, also from First Albany, joined as a senior vice president and position trader. The firm's institutional equity sales team added Holly Hansen as a senior vice president. Hansen, who is based in the firm's San Francisco office, was previously with Alex. Brown. Sanderson (Andy) Read, from McDonald Investments, joined GKM's Chicago office and James Van Tassel, formerly with Morgan Stanley, joined the firm's headquarters in New York. Both Read and Tassel are with the firm's institutional equity sales group.

*Financial Technologies in New York named James Dooley president and chief operating officer. He was previously with Merrill Lynch.

*The Nasdaq Stock Market named Michael Sanderson chief executive of Nasdaq Europe. Sanderson, is based in Nasdaq's London office.

Dealer Rebuilds After WTC Tragedy

Cantor Fitzgerald, the trading firm that lost some 700 employees in the attacks on the World Trade Center, is rebuilding its equities desk.

The firm, which had dealing desks on the top floors of the North Tower, has relocated part of its trading operations to 299 Park Avenue, space once occupied by UBS Warburg.

The firm has returned to making markets in about 400 Nasdaq stocks and is bringing in new traders. Cantor has hired some 30 traders, including listed, Nasdaq/OTC, and sales traders. "You can't sit around," said Philip Marber, the firm's president of institutional equities.

"Volumes are good," he added. "We are not fully staffed yet. So it's still a little stressful and kind of hectic. But we are getting through it."

Cantor is also calling up its alumni to man some of the firm's senior spots. Adam Mattessich, who was previously with HSBC Securities for only a few months, and formerly with Cantor for four years, has rejoined to co-head its international trading desk. Keith Rance, who was based in the firm's London office, returned to New York to co-head the desk with Mattessich.

The international desk also hired Stephen Noden, previously with J.P. Morgan, and Luke Hannafin, formerly with ABN Amro.

SEC Gives Traders Regulatory Break

It was the least of most traders worries in the wake of the horrific attack on the World Trade Center.

Owing to the disaster, Nasdaq trading markets have had more time to comply with two new rules governing trading execution quality and order routing.

The Securities and Exchange Commission extended until the end of November the receipt of monthly reports from market centers under Rule 11Ac1-5, moving it back from September. The first reports will cover October trades.

Another mandate, Rule 11Ac1-6, requiring broker dealers to file reports on order routing practices, was also extended from October to November for transactions in the third quarter.

The agency's action was prompted by the attack of Sept. 11, which damaged Wall Street's trade processing capabilities while causing widespread sadness.

However, this is not the first time the agency has pushed back the deadlines, which is not an unusual occurrence in trade processing projects.

The order execution quality disclosure rule for listed securities had its third postponement this summer. At the prodding of the Securities Industry Association, the SEC postponed the initiation date by three months to Oct. 1.

Buyside Survey Casts Doubt on Decimals

Decimal pricing on the New York Stock Exchange and Nasdaq is not good for market liquidity or transparency, according to a new survey of buyside traders.

More than 75 percent of traders polled at a cross-section of institutional firms also said they have changed trading strategies since decimal pricing was introduced in Aug. 2000 on the Big Board and last March on Nasdaq.

About 80 percent of respondents noted "a change in volatility" since decimals were implemented. Ninety percent of respondents did not see this as a benefit.

What's more, some 80 percent did not believe a minimum increment of $.01 in the bid or offer to be reflective of price improvement; 60 percent believe the minimum increment should be $.05 for specialists and market makers who want to outbid' a limit order. Some 70 percent say the minimum price improvement should be available to all market participants. The survey, conducted by Midwood Securities, an institutional broker dealer, received responses from 100 of the 600 traders polled. The traders work for firms with assets under management ranging from $500 million to $700 million.

In other findings, about 50 percent of respondents support Big Board rule changes to increase the minimum price improvement necessary to break up an agency or principal cross. Some 80 percent believe specialists have gained the most from the switch to decimals; two thirds say it is institutions that have gained the most.

Military Vets Take Charge

The military training of some traders was a critical factor in helping save many lives in the recent World Trade Center attack.

When the second airplane hit the south tower of the World Trade Center on Sept. 11, Art Gorman, Jr., a manager of Nasdaq trading at Merrill Lynch – and a former U.S. Marine officer – stepped into combat readiness.

Gorman, who served in both the Persian Gulf War and in Somalia, commanded his troops – in this case, his fellow traders and support staff – to immediately flee the World Financial Center. It is located near the toppled twin towers and was damaged in the attack.

Gorman, along with another Merrill trader, Bruce Dillard, a former U.S. Navy pilot, led several employees to the stairwell exits.

"We saw the plume of 20 stories worth of fire," Gorman recalled. "Dillard and I said, Everybody out! Let's go! It must be some kind of attack.'"

Military vets are well represented on Wall Street. Diron Scott, another former Marine officer, who is a Nasdaq trader at W.R. Hambrecht in San Francisco, has a theory of why vets make good traders. "Marine officers are able to make decisions very quickly and they are able to work with all types of people," Scott said, "They are able to look at a scenario and come up with a detailed plan. The same applies to trading."

"You come up with a game plan in trading," he added. "You implement certain tactics." Yes, sir.

Besieged Dealers Search for Profits

Dealers hurt by the bear market and decimal pricing, must find creative ways to restore normal profits, one trading executive warns.

"Sellside firms will have to get better at reading the tea leaves," said Mark Madoff, an equity trading director at Bernard L. Madoff Investment Securities. "Dealers will have to put greater value on deciding which way the stock price is heading."

Madoff, which trades the 200 most active Nasdaq names, doesn't see a more commission-oriented system as the best response to narrowed spreads.

However, E. E. "Buzzy" Geduld, chairman of Nasdaq wholesaler Herzog Heine Geduld, thinks it is inevitable that an agency arrangement will materialize.

Ben Marsh, managing director of equity trading at Adams Harkness Hill, also sees agency relationships becoming popular. Marsh, like others, thinks that the leadership has to come from the large institutional firms setting the agenda.

Madoff preaches vigilance. "It used to be that you could tell the direction a stock was headed from looking at the quote only," he said. "Now, you have to look at a lot more."

Nasdaq spreads, which averaged 15 cents a share in Aug. 2000, fell to five cents by April 2001. That's when decimalization was completed and SuperSOES was launched.

While some dealers are nervous, others may have reason to cheer. "Spreads remain dramatically below their pre-decimal levels," said Nasdaq deputy economist Frank Hatheway. "In providing faster executions and price discovery, SuperSOES is taking out the narrow inside more quickly yet SuperSOES has resulted in no increase in effective spreads. That represents the direct cost to investors."

Rebate Policy Launched by ECN

Broker dealers will receive new discounts under a rebate program announced by BRUT, an ECN hoping to capture market share.

The rebate policy means that broker dealer customers who initiate orders that result in trades equal to or greater than 500 shares will receive $.001 per share (or 10 cents per 100 shares).

Rebates to customers – in the wholesale dealer business, and even in the ECN business, for instance – are not unusual on Wall Street. But BRUT's program is viewed as somewhat aggressive, a move by a top ECN to wrestle order flow from rivals.

BRUT's program applies to Nasdaq stocks traded by U.S. customers; there is no dollar cap or expiration date on the program. "Our customers, and market makers in particular, are facing increasing pressures to be profitable as a result of decimalization and the current market environment," said Richard Schenkman, chief executive of BRUT. "We are helping to provide them with a solution and, in the process, to deepen liquidity for both our broker dealer and institutional customers."

In addition to its rebate program, BRUT recently added pegging functionality to all of its interfaces, including FIX and Universal Market AccessTM.

MOST READ

SUBSCRIBE FOR TRADERS MAGAZINE EMAIL UPDATES

[activecampaign form=12]