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.

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December 1, 1999

Cover Story: Schwab's 18 Month Challenge - Will the Third Time Be a Charm?

By Gregory Bresiger

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  • Cover Story: Schwab's 18 Month Challenge - Will the Third Time Be a Charm?

Lon Gorman, with some 30 years of trading background in the securities business, was on his way to running a hedge fund in 1996. Running a hedge fund was going to be his new career after some 16 years at First Boston, which had lost its independence to Credit Suisse because of its disastrous stockpiling of junk bonds.

Gorman, who had rebuilt First Boston's block trading operations in 1990, was uninterested in running another trading division. He believed he was suited to running a hedge fund operation because his background was mainly "in trading and taking risks." Then he was bowled over by an executive recruiter who was persistent.

"My first reaction was I'm not interested. But then I realized that they were willing to commit a lot of capital. And the recruiter insisted that I was the only person for the job," Gorman said. After talking to dozens of people at the giant brokerage, Gorman concluded that "Schwab had come to the realization that there was value in the institutional order flow."

After running a sprawling operation at First Boston, which had some 300 traders, Gorman was intrigued by the Schwab offer. He was intrigued enough to put the prospect of running a hedge fund on hold. Here was the possibility of doing something that he wasn't able to do at First Boston or elsewhere: building a trading operation from the ground up; having control of all parts of a trading operation; and knowing what was profitable and what was not. That kind of control was not possible when he was an executive of First Boston, a firm whose "culture" had changed by the mid-1990s when he left. "It was no longer a collegial family," Gorman said.

The Executive

Gorman is now vice chairman and a member of the management committee at Charles Schwab Corp. He also has the title of President, Schwab Capital Markets & Trading Group, and also serves as chairman and chief executive of Mayer & Schweitzer (Schwab's Nasdaq market-making subsidiary).

Gorman's career began in the late 1960s when he worked as an order clerk in Hempstead, Long Island, while he was attending nearby Aldelphi University. Running Schwab's efforts will likely be the greatest accomplishment or the greatest failure of his long career, which has included working as the partner responsible for sales and trading at F. Eberstadt & Co.

Now the former global equity trading head at First Boston is going to try to do something that no one at Charles Schwab & Co. has been able to do before: make the nation's largest discount brokerage an institutional trading power. And he promises to do that within the next year and a half.

Schwab, he adds, won't be another Goldman Sachs or Salomon Brothers after the makeover. It won't be in the top five of institutional trading, but he says it will be an institutional power. More importantly, Schwab's trading operations will be more diversified; they will not be as vulnerable to a new trading environment in which margins will decline.