Commentary

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.

Traders Poll

Are you in favor of a pilot program and examination of the rebate system by the SEC?




Free Site Registration

May 31, 1998

The Acorns Don't Fall Far

By Michael L. O'Reilly

Also in this article

  • The Acorns Don't Fall Far

Richie Fink got his start in asset management as a Yonkers schoolboy almost 40 years ago.

In elementary school, Fink's father set up an imaginary mutual fund to teach the third grader about the stock market. Fink loved following his stocks, and even wrote about his new hobby in a school essay.

In sixth grade, Fink's father let him buy five shares of stock, to teach the prodigy how to research a company. He bought Xerox, and would sneak out of his classroom to a pay phone to call his father's broker for daily updates. "I finally sold the stock after it tripled in value," Fink said "After that, I was hooked."

Today, Fink is still managing assets, although on a larger scale. He is the head of trading at U.S. Steel & Carnegie Pension Fund in New York, the registered investment advisor for U.S. Steel Corp.

The investment advisor manages the pension accounts for U.S. Steel Corp. and its smaller subsidiaries. Ten analysts handle more than $11.5 billion in assets. Of those assets, roughly $6.8 billion is invested in equities, $3.8 billion in bonds and $900 million in a short-term cash portfolio.

Executing the bond and equity transactions for the analysts, Fink estimates he makes 100 trades each week, and works regularly with 50 brokers during the year.

Aside from trading for the U.S. Steel analysts, Fink manages the $900 million cash portfolio. He handles the account with the same schoolboy enthusiasm that first blossomed in the sixth grade. Over the last six years, he has doubled the short-term return rate of the cash portfolio with option buy-writes.

"Buy-writes give me the opportunity to participate directly in our performance," he said. "I know I'm personally responsible for a small percentage of our growth."

An option is a right to buy or sell a security at a prespecified price in exchange for an agreed-upon premium. An option has an expiration

date usually three, six or nine months and if the right is not exercised by that date, the option buyer forfeits the premium.

A call option, for example, gives a buyer the right to purchase a set amount of shares of a security at a fixed price before a prespecified date. For this right, the call-option buyer pays the seller that is, the writer a premium. If the buyer does not exercise the option before the expiration date, the premium is forfeited to the seller. A buyer speculates that the price of the underlying shares will rise before the expiration date. So, for a premium, the buyer can buy the shares at the lower exercise price and sell at the higher market price.

A buy-write, on the other hand, is on the seller's side of a call option. Fink will buy a stock and simultaneously sell an option against the stock, hoping the stock price doesn't fall significantly before the option expires. By selling an option against the stock, Fink in effect lowers the price of the stock purchase by the price of the premium. As long as the stock does not drop more than the premium before the expiration date, Fink will profit. And if the option is not called because the stock rises, he will pocket the premium.