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Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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February 1, 1998

D.E. Shaw Securities Hires Agency Block-Trading Team: An Aggressive Push for Market Share Heats Up

By John A. Byrne

DE. Shaw Securities has embarked on a new business goal, elbowing for more room among the bulge-bracket firms that trade most of Wall Street's agency block orders.

The New York-based broker dealer is directing the operation out of its 50-person U.S. equities unit on the 25th floor of the firm's midtown Manhattan offices.

D.E. Shaw, named after its founder and president, ex-computer professor David Shaw, has a reputation for secrecy. But not when answering questions about its latest hardball tactics wrestling with the giants in the world of agency trading.

"We're utilizing our quantitative expertise and the customer relationships developed in our basket-trading business," said Mony Rueven, a managing director at D.E. Shaw, who heads the U.S. equities unit. "We have a great service."

Most recently, the firm installed a team of sell-side pros to fill the newest niche in D.E. Shaw's overall equity-trading arsenal, with includes a third-market business.

The team includes former New York-based Furman Selz pro Bob Rice, who heads a soft-dollar services unit working with a three-person sales-trading group that was installed last month. The sales trading pros are Tom Shapero and Adrienne Toscano, both previously with Jersey City's Sherwood Securities. They all report to Jim Willsey, head of U.S. equity sales.

"We weren't waiting for the business to come to us," Reuven said. "We put this team in place late last year to sell and to facilitate our block-trading services"

Facing stiff competition from powerhouses such as Los Angeles-based Jefferies & Co. and Cantor Fitzgerald of New York, Rueven was confident, however, that there is room for more players.

Nick Gianakourous, a vice president in D.E. Shaw's equity unit, said the firm averaged up to nine million shares monthly since it started doing agency business in early 1997.

"Our agency business grew by more than 300 percent for the year ended Dec. 31, 1997," he said. About 90 accounts alone were added in the last quarter, bringing the total amount of accounts to "several hundred."

D.E. Shaw is hoping that its quantitative expertise, and its three-year-old principal-guaranteed or basket-trading business, will provide a strong base to build a block-agency business, giving salespeople handling its single stock orders an important supply of inventory.

In addition, the principal-guaranteed and third-market business provides D.E. Shaw with customer relationships, including about 100 broker dealers and institutions on the third-market side, critical for finding natural counterparties on a trade.

A principal trade enables a customer holding a block order to transfer the inherent market risks to a dealer who purchases the shares for his own inventory. The dealer, in turn, hopes to unwind or profit on the position. A principal trade is utilized by many investors to quickly unwind a position in an illiquid stock. Conversely, investors sometimes find it cheaper to cross the stock on an agency basis in highly-liquid stocks.