Commentary

Jared Dillian
Traders Magazine Online News

Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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July 31, 1999

Are Traders Getting It?

By Gregory Bresiger

Success has a thousand fathers. Failure is an orphan. So goes the old saw that could easily be applied to the trading business.

The biggest reason why some traders become orphans--that is professionals without a firm--is the lack of communication between traders and their constituents, says Thomas Bardong, a buy-side trading executive with some 30 years in the business. When he began as a trader with a small firm in 1968, Bardong says he had little contact with analysts and portfolio managers.

"Today, more than ever, trading desks need to communicate with portfolio managers and analysts. When I started, a trader talked with a portfolio manager much less," he said.

Bardong, 54, is senior vice president and head of equity trading for Alliance Capital Management.

Of course, back in the late 60s, when Bardong began, there were thousands fewer mutual funds and far fewer portfolio managers. There were far more individual orders. Trading firms are adjusting to a signal change in the securities business.

Alliance has been one of the winners in a world in which institutional business has exploded. Alliance's assets have grown from $2 billion to $300 billion over the past two decades. The business is evenly divided between equities and fixed income.

The need for better communication has taken place in a period in which Bardong's business has moved primarily from individuals to institutions. Mutual funds are far more important than two decades ago. Analysts and portfolio managers, Bardong agrees, are much more demanding. They have trading strategies that they expect the trader to know and follow, Bardong says.

Other problems threatening to turn buy-side traders into orphans are the lack of liquidity in some issues and the problem of paying traders.

As spreads keep narrowing on many liquid stocks, the idea of compensating sell-side trading desks using commissions looks more likely, Bardong predicts.

"We've seen spreads go down to as little as one sixteenth and less; the less liquid stocks have suffered," Bardong said. Spreads, in many cases, can be so small that firms putting up capital for a trade are losing money.

"I believe commissions are an issue that Nasdaq is going to look at very seriously," Bardong added.

But although there is little disagreement in the industry about the problem of illiquidity, there is no consensus on how to attack the problem.

"Nasdaq trades should be done on a commission basis, but not for all stocks," said Peter DaPuzzo, president of institutional equity sales and trading at Cantor Fitzgerald & Co., in an interview last December with Traders Magazine." There is going to be a group of stocks that won't qualify, somewhere above the small-cap stocks on the OTC Bulletin Board and below the top 2,500 Nasdaq stocks," he said. Bardong disagrees about a piecemeal approach to commissions.

"I believe it would be better to add commissions right across the board," he said. Bardong, and others in the trading world, are anxiously waiting for action from Nasdaq.

Whichever reforms are enacted, traders will continue to be on the firing line. It's a tough business. And Bardong knows that those firms and traders without a coherent system will end up losers in a feral business, a business with lots of orphans.