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August 31, 1999

Small Dealer Exits Retail For Institutional Business

By Peter Chapman

In another sign that the retail side of the third market is feeling the pain of slim spreads, Alexander Wescott & Co., a small market maker in listed stocks, is reinventing itself as a block trader.

The New York-based firm, which had gross revenues of $7 million last year, recently dissolved its small-order business and signed Trimark Securities veteran Steve Braverman to run a block desk. He will head a team of four position traders and one sales trader. The firm will act as a market marker and an agent in listed stocks. Nasdaq trades will also be eventually traded.

Target customers are institutions and accredited private investors, or those individuals with one million dollars in net assets and a salary of at least $200,000 a year for the last three years. Trades must be of at least 10,000 shares, or $200,000.

Wescott's revamp is in line with moves by the two giants of the third market's retail side, Trimark Securities and Bernard L. Madoff Investment Securities. Last year, Trimark inaugurated a block desk under the guidance of ex-PaineWebber pro John Gephardt.

Block trading remains a profitable business for dealers.

By contrast, narrowing spreads have substantially reduced profitability on the retail side but resulted in lower transaction costs for individual investors. Braverman explained that the institutional market is less efficient and, therefore, still profitable.

"No one is making money off the spread [on retail trades]," said Bernard Madoff, a principal at the firm that bears his name.

Madoff is sticking with the retail business, albeit in a different form. Next year, Madoff will launch Primex NA, an electronic trading system, allowing the firm to charge customers rather than pay them for trades with rebates, as it does now.