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: Mayer & Schweitzer's Black Box and New Science

By John A. Byrne

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  • Cover Story: Mayer & Schweitzer's Black Box and New Science

The order handling rules left Mayer & Schweitzer in the same tight corner as other Nasdaq market makers. Spreads narrowed, initially on the most heavily traded stocks, while profits margins contracted. Mayer, the most profitable unit of Charles Schwab & Co.'s Capital Market & Trading Group, saw the number of profitless trades rise - from 10 percent of overall trades to about 25 percent today. The rules made trading more complicated and even harder to translate into a profitable solution.

Enter Lon Gorman, a hard-driven trading veteran who had just ended a career as head of global equity trading at First Boston. Gorman was headhunted to reinvent not only the Mayer money machine but also the whole Capital Markets unit, which he now runs. Gorman brought his analytical approach and his unquenchable drive for success.

The Vision

At Schwab's Jersey City executive offices, which has a bird's eye view of New York harbor, Gorman is talking up a storm as he outlines his vision for his unit's future in institutional brokerage and research, fixed income sales and trading, equity syndicate operations, options and futures trading and in structured products. "There's a lot of scar tissue on my back," he reminds a reporter. For Gorman, there is plenty at stake. Principal transactions contribute about 14 percent to Schwab's revenue.

Gorman, who is in charge of 700 employees, says trading is not for wimps. "Anybody can be successful running a business in a bull market," he said. "You don't need to be a rocket scientist and you don't need an MBA from Stanford."

"When the tide goes away," he added, casting his eyes eastwards towards the distant canyons of lower Manhattan, "the men get separated from the boys."

Gorman sees trading in a new light - a business that is no longer predicated on predictable spreads. That means managing inventory and using advanced technology.

Seated at his side is Marty Cunningham, the fresh-faced senior vice president and manager of Mayer, a business which accounts for about 9 percent of trading on Nasdaq stocks. Cunningham's unit is responsible for about 70 percent of the capital markets' profitability, down from 85 percent two years ago. The market maker has about 50 position traders, as well as 70 support staff covering 5,000 issues, and it is still growing. While the other units are now contributing a larger share of profits than before to the bottom line, Mayer is still the most important business.

The Scream Test

Cunningham, who started at Mayer in 1977 as a runner while still in high school, says the desk is moving beyond "the scream test" for judging the quality of individual trader's performance. "It is no longer a matter of pure gut feel," said Cunningham, who graduated from Fordham University. "It is a matter of combining the direction one may get with your order flow and the sense of the market."