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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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February 1, 2000

Trading the Pinkies: Does a small brokerage in Jersey City have a better idea f

By Sanford Wexler

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  • Trading the Pinkies: Does a small brokerage in Jersey City have a better idea f

An unpretentious backwater

of the securities industry is looking a lot more glamorous for investors and institutional traders.

Business is starting to hiss and hum in the small-cap trading area. Hill, Thompson, Magid & Co., one of the oldest dealers in pink sheets, bulletin board and other small-caps, perfectly illustrates the swift pace of change.

The Jersey City-based firm is embarking on an overhaul that would directly connect the market maker to a new web-based brokerage subsidiary aimed at online investors. More importantly, the move demonstrates how fast the small-cap arena is shedding a reputation for obscure bargains, as well as stodgy technology.

Overhaul

Other players in the small-cap area are also considering, or have launched online retail systems. The overhauls are just part of the makeover. Earlier, the National Quotation Bureau, which publishes the pink sheet stock prices, began disseminating the information on the Internet.

Hill, Thompson's link with web-based brokerage, NET Securities, comes as Hill, Thompson adjusts to life as an autonomous subsidiary of deep-pocketed Freedom Securities Corporation.

Boston-based Freedom Securities, which acquired Hill, Thompson in May for $45 million in cash and stock, was attracted by Hill, Thompson's expertise in trading small-cap stocks.

The attraction is mutual: In return for access to Freedom Securities' capital, customer order flow and strong retail distribution, the Boston behemoth acquires a solid niche player. This is a player whose profit margins exceed the average earned by market makers on stocks not traded on the pink sheet and bulletin board market.

Freedom Securities owns retail brokerages Tucker Anthony Cleary Gull and Sutro & Co. as well as municipal bond houses Hopper Soliday and Gilbraltar. John Goldsmith, chief executive of Freedom Securities, said his firm was attracted to Hill, Thompson because of its expertise in trading small thinly-traded securities.

(Hill, Thompson benefits from the acquisition in a more nuts-and-bolts way. The arrangement could lower its back-office costs through cost-saving arrangements imposed by Freedom Securities.)

Hill, Thompson, which was founded in 1932 in the midst of the Great Depression, employs about 40 trading pros. The firm's president Nicholas Ponzio, attired casually like most of the firm's staff, says "business has been phenomenal since the merger. We are getting more and more orders from [Freedom's units]."

Hill, Thompson did not disclose its volume but Ponzio said one telltale sign of growth is headcount: the firm plans to add about 10 to 15 traders. Most of Hill, Thompson's orders are still from other dealers. (The bulletin board volume across Wall Street is estimated at under 30,000 trades daily. Knight Securities in Jersey City is reportedly the largest market maker in bulletin board stocks as measured by trades executed.)

Hill, Thompson makes markets in about 1,000 Nasdaq Small Caps and 7,000 OTC Bulletin Board and pink sheet securities. The firm said it added 100 Nasdaq stocks delisted from Nasdaq as a result of tougher listing requirements. (Not all the stocks traded by Hill, Thompson are small-cap issues. There is a solid list of large-cap names such as Kohler Co., a bathroom fittings manufacturer in Minneapolis. These companies either choose to stay away or do not qualify for listing on Nasdaq or on the New York Stock Exchange.)

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